Defence Evaluation and Research Agency

HL Deb 17 April 2000 vol 612 cc530-50

7.40 p.m.

Lord Hogg of Cumbernauld

rose to ask Her Majesty's Government what their long term objectives are for the Defence Evaluation and Research Agency as part of the development of the United Kingdom's knowledge-based economy.

The noble Lord said: My Lords, I am most grateful to the House for affording me the opportunity to raise what I believe to be an important matter. I am reinforced in that belief having read the business section in yesterday's Sunday Times.

I begin by commending the Government's recent publication of the consultation document on science and innovation. Within it there are several key principles in which, as a government, we have strongly believed for many years.

The Government look at the UK's science base as a key driver for economic growth and international influence. They are actively promoting greater technology transfer and unlocking the scientific resource residing both within government and through our universities to the benefit of the economy and the country's quality of life.

However, we must be careful not to allow the forces of conservatism—if I can use that phrase—to thwart our vision of an active knowledge economy. I refer in particular to the proposed public-private partnership restriction on the Defence Evaluation and Research Agency, the MoD's science and research agency.

I shall give some facts that demonstrate the significant scientific and technological achievements of some of our country's unsung scientists and technicians. I shall mention just three to make my point. DERA were behind the original technology for liquid crystal display; the original and new generation of carbon fibre; and the next generation of voice recognition software. Without DERA, many technologies that we take for granted today would not have been developed.

The proposed PPP for DERA aims to offer the organisation the opportunity to work more effectively within the civilian market; to exploit its knowledge into real and tangible businesses and to enter into new joint ventures establishing a vibrant centre for technological development and wealth creation. Put simply, it would be a world class resource.

The purpose and intention are sound, but I am concerned about the proposed method. In my view, the proposed method for releasing DERA runs counter to the Government's overall intentions. The organisation is proposed to be divided into two separately run bodies: the sensitive research functions would be in an organisation still run by the MoD and the technology side would be split to form a company attracting private finance. While that deals with the security elements of the work of DERA that is retained by the MoD, potentially it offers the worst of all worlds.

One of our great scientific jewels would be dismembered. By separating the sensitive from the technological, we would lose one of the most important elements of DERA, which is its ability to translate the sensitive into the commercial. We would destroy the bridge between the two that is unique and valuable. The value is in the relationship between the two. We should resist that divorce.

There is also the employment issue. I understand that the model proposed could result in over 3,000 job losses in the sectors where we are working hard to encourage more employment. I hope that the Minister will say something about that. I further understand that the United States is concerned about any joint collaboration falling within the private sector. I appreciate that concern. However, we must not construct the whole model on that basis. Under the existing structure DERA manages the divide between areas of United States security collaboration and the more commercial elements of its work effectively. That raises the question: could that continue as effectively into the future?

The challenge for those addressing this issue is to marry the following concerns: to maintain the justifiably sensitive research within the Government's domain—I emphasise the word "domain"—to ensure that the overall objective of liberating a core international centre of research and technological development is achieved with significant benefits to the UK economy, and to maintain the integrity of the organisation and its staff at the highest level possible.

At the moment a good model is already being debated in Parliament: the publicly owned plc proposed for the Post Office. I believe that that offers the best solution. It would provide the ability to reassure the United States that the sensitive elements of DERA are still government owned and managed. It would give DERA the ability to enter into long-term ventures, to attract finance for longer-term investment and to develop subsidiary companies in non-sensitive areas; and it would maintain the integrity of the organisation, ensuring that this unique centre of excellence was not dismembered into two rather average organisations, if I may put it that way. We should retain the employees within the public sector and ensure that the long-term assets of DERA are exploited for the greater benefit of the United Kingdom.

I commend to my noble friend the liberation of DERA from the confines of MoD into a free-standing, publicly owned plc without destroying the long-term potential or existing integrity of an organisation of which we can all be proud.

7.47 p.m.

Lord Faulkner of Worcester

My Lords, I congratulate my noble friend Lord Hogg of Cumbernauld on securing a debate on the future or the Defence Evaluation and Research Agency. The outcome of the Government's review has been awaited anxiously by the 12,000 people who ate directly employed by DERA and by many thousands more who live and work in the towns where the agency is based, and who, to a greater or lesser extent, are dependent on DERA for their own business livelihood.

I intend to speak mainly about the DERA establishment that I know best as it is situated close to my home in Worcestershire. Although I have lived in the Malvern area for most of my adult life and have been aware of how important DERA is to the economy of the town and its surrounding area, it was not until some weeks ago when my noble friend first sought this debate that I arranged to spend the better part of a day at DERA Malvern to find out more about what they do there. I am pleased to put on the record my thanks to Dr Norman Apsley and his team for giving me such a comprehensive and impressive view of DERA Malvern's work.

It is hard to over-estimate the importance of DERA to the area. DERA Malvern's turnover is over £150 million and the financial impact on the local economy is worth a further £50 million annually, taking into account the spending of salaries and commercial arrangements with local suppliers.

DERA Malvern provides much of the MoD's advice on Command and Control and on sensors, which, in cost value terms, probably represents at least half of the £9 billion equipment spend each year. In addition, the technology itself is made available to the defence industry. This has resulted in 13 Queen's Awards and other prizes.

DERA is by far the largest single employer in the town—including the two associate outstations at Defford and Pershore, there are 2,250 staff working for it. Of these, no fewer than 1,800 are first-degree graduates and 900 have PhDs. Their fields cover physical electronics, communications and computing. John Jay, writing in the Sunday Times on 20th February this year, described DERA as, one of the world's finest collections of research talent". There can be no other non-university town in the land with such an academic population as Malvern. The link with education is intensified because many spouses and partners of DERA employees are themselves teachers at local schools. Members of staff have always participated fully in the life of the community, serving on local political bodies and charitable bodies and working with schools and other organisations.

DERA supports education in the town through sponsorship of the local high school's technical college status and in many other ways, such as science weeks, the "Bring our Children to Work" scheme, scientific and other professional work experience. It also acts as a local focal point for national institutions, such as the Institute of Physics and the institute for electrical engineers, and it hosts or sponsors local lectures and seminars. It offers a local venue for the annual DTI sponsored Innovation Lecture.

In the autumn DERA is also one of the main supporters of the Malvern Festival, which was created by DERA scientists four years ago. It is an integral part of the district, the county and the West Midland economic strategies. The director, Dr Apsley, is a member of the Regional Innovation Strategy Steering Group and a CBI regional councillor.

The Malvern Hills Science Park is a joint endeavour between DERA, the district council, the county council, the chamber of commerce and the Regional Government Office. It opened last September on land leased from DERA. The Defence Diversification Agency has one of its seven offices on the park and, with DERA, is working well with local businesses.

I turn now to the wider West Midlands. DERA wants to create a regional market for its science and technology advice. It is just beginning a project funded from the EU and the Government Office, called DERA Malvern Science Laboratory, which aims to use their collective science and technology to support and create new business in the West Midlands Objective Two sub-regions. DERA Malvern also succeeds in selling its wares to West Midlands businesses such as Jaguar, Rover, IMI and Dowty Wolverhampton.

There is more that I could say about how crucial the future well-being of DERA is to the well-being of the town, the county and the region, but I hope that your Lordships will have gained enough of a picture to understand how anxiously the outcome of the Government's review has been awaited. There is general acceptance that retaining the status quo is not an option. The end of the Cold War and reductions in defence spending meant that the flow of work from the Ministry of Defence would, inevitably, slow down. However, the scope for high level work with the private sector is enormous and I have already given noble Lords some examples this evening.

I am aware that DERA's trade unions were opposed to any solution that involved a break-up of the agency, or put it into the private sector. But my own view is that the public private partnership that the Government put forward as their preferred option in May 1999 could have worked and was worth a try. The consultation document of the Ministry of Defence at that time spoke of creating, a special purpose corporate vehicle containing most of DERA's existing staff and facilities. DERA would operate in the private sector with mechanisms to preserve its essential character and to protect MoD's interests". MoD said that, a principal driving force in arriving at the proposed option was the desire to keep DERA, as far as possible, an integrated organisation and thereby retain its broadly based capability". This became known as the "Reliance" option.

It would not be true to say that these proposals were universally welcomed; indeed, far from it. The trade unions combined to produce a "privatisation campaign newsletter" and urged a mass letter writing campaign to Members of Parliament in another place. Private sector defence companies did not much like the idea of a new highly-experienced competitor advising the MoD and competing with them for research funds. The Defence Select Committee did not like it and called the proposals "fatally flawed".

Had the opposition come just from political and trade union sources in this country, I suspect that the Government might have pressed on with the "Reliance" option. But I believe that the Financial Times got it right on 31st January when it reported that the United States Pentagon had vetoed this approach because, US military chiefs reacted with alarm to a proposal that could have involved British defence companies getting their hands on US secrets during collaborative projects. The government's first plan, to keep most of DERA together and sell a stake to investors, was blocked by the Pentagon, who feared the potential leak of its secrets to the detriment of US national security and American companies". So that went off the agenda and, until today, we were still waiting to hear what the Government's decision would be.

One possibility might have been a minority sale of the whole company, in the way described by my noble friend Lord Hogg of Cumbernauld, which would have made DERA a Government-owned company with some of the shares going to the private sector. But, frankly, I cannot see how the Americans could have gone along with that idea, given their opposition to the "Reliance" option, because, in their eyes, the private sector would still have been involved to an unacceptably large extent.

Therefore, it is not surprising that "Core Competence" now seems to be the preferred option, with perhaps 3,000 of DERA's employees becoming MoD civil servants, providing the core of knowledge to the Government and enabling them to work on secret projects with the United States, as well as offering impartial advice on weapons procurement.

It is interesting to note how much of this debate has been conducted in the media. Indeed, Flight International magazine suggested in an article in its 25th January issue that, the core competences would include the Centre for Defence Analysis, the chemical and biological warfare capability at Porton Down, its library service and areas believed to include access to US surveillance satellite data". The remainder of DERA would then be offered to the private sector through a PPP. That, because of the nature of the work carried out at Malvern, would obviously include a very large part of the DERA operation in that town.

I am clear that DERA represents a unique national resource which must be given every encouragement to grow and prosper. Already at Malvern they are looking to expand their outside commercial work from 6 per cent of turnover in 1999 to 33 per cent in 2005. They envisage no reduction in staff during that time.

I am sure the Government appreciate the paramount importance of ensuring that they do nothing to destroy the conditions that will allow DERA in Malvern, and elsewhere, to continue to play such a vital part in the life of the towns, the counties and the regions in which they are situated, as well as in the nation's defence industry. I very much look forward to hearing from my noble friend the Minister what route the Government have finally decided to adopt.

7.57 p.m.

Lord Brett

My Lords, I congratulate my noble friend Lord Hogg of Cumbernauld on initiating this very timely debate. I echo his support for the public sector option. I echo too the appreciation of my noble friend Lord Faulkner of Worcester of the quality and value of Malvern. I, too, read the Sunday Times. I have to say that I read the headline, MoD Research Sale Puts 3,000 Jobs at Risk", with more than a little anger.

There are those who would say that Parliament has the first right and responsibility to hear of major government decisions. Although that is important, I actually take a slightly different view. Do not the staff concerned have the right to hear such news from their employer first rather than reading about it in a national newspaper, which, inevitably, will not always be correct? In this situation, they had a choice. They could either ignore completely the fear of a 3,000 job loss; or they could read the business section story in the Sunday Times—which, incidentally, was quite credible as regards the now-known facts—and then realise that there was an option before them which was not the one they would wish to see and which could be quite damaging to their interests.

It is disgraceful that such a leakage took place in this way. I ask my noble friend the Minister to give an assurance that the MoD was not responsible in any way for it. Since then, like other noble Lords, I have had the opportunity to obtain a copy of the consultation document, which was made available at 3.30 p.m. today. It provides for 30 working days—a very short period— of consultation on the Government's preferred option, which is not the option that my noble friend Lord Hogg and I would have preferred.

However, rather than continue that debate, I make the obvious statement that the consultation document begs many questions. I have a number of questions for the Minister. I recognise that as I have had the document for only some three hours, my questions will not be as comprehensive as I would wish. I do not seek comprehensive answers from the Minister to all my questions. I shall be happy with a written reply if the Minister feels that at this point insufficient detailed information is available to enable her to respond.

It is interesting to note that the consultation document recognises the stakeholder interests. Here I should declare an interest. Before I entered the House a year ago I retired as general secretary of the Institution of Professionals, Managers and Specialists, the membership of which includes the vast majority of the scientific and technological staff of the Ministry of Defence, including those employed in DERA. Therefore I have had an intimate knowledge of the events we are discussing. Since I entered the House I have maintained an interest in those events although the views I express tonight are my own.

However, in terms of the stakeholders, what can he offered to the private sector? It is not a case of offering a production line or a series of items of high technology, but rather the intellectual property rights that derive from the skills and experience of scientists and technologists. The work of the scientists and technologists has given DERA its high reputation for innovation and technology. The stakeholders comprise an important clement of DERA. Unhappy stakeholders never result in a company being successful. I hope that we shall do much more than we have done so far to reassure the staff about their future.

The noble Lord, Lord Faulkner of Worcester, mentioned the views of the Select Committee in another place on the matter we are discussing. I believe that most of us recognised that the Smart procurement initiative was a worthwhile way forward. However, that begs the question as to whether our defence research industry would be prepared to collaborate with the public private partnership, which would involve a substantial privatised element. It has indicated its unhappiness on that issue over the past 12 months. That is a major issue. We know that the staff—one stakeholder—are unhappy at the moment, but we may be able to assuage their worries over time. In the next 30 days we shall discover whether the defence industry—another major stakeholder—is equally unhappy, or whether it has been placated by the contents of the paper that is before us.

A number of questions need to be answered. Are intellectual property rights to be transferred from DERA to the new PPP? Clearly, the intellectual property rights will have a major impact on any evaluation of such a body. Do we have an estimate of the costs of separation? Throughout a dynamic leadership of DERA in the past decade, Sir John Chisholm has spent much time and effort and has been successful in bringing about a much more integrated agency. Ironically, some degree of separation now appears to be proposed which must involve associated costs. I refer to the creation of Chinese walls and the re-creation of duplication in some areas that we have removed. Again, the Minister may not be able to respond to that question tonight, but I hope that the answer will be forthcoming.

A number of concerns arise as regards staffing issues. The Principal Civil Service Pension Scheme is valued for its ability to provide pensions that respond to periods of higher inflation than we suffer from at the moment. Staff will wish to ensure that that valuable part of the remuneration package is not undermined. Many staff have many years of accumulated rights under the scheme in terms of redundancy provision. There have been fears at the time of previous privatisations—I refer to the dockyards and others— that subsequent private sector employers might alter such benefits on the ground of cost. That, again, is an area where staff need to be given assurances.

I am more curious than outraged by the suggestion that military personnel will work under the new arrangements with their status unchanged. I am fascinated to know how the command structure will operate if military staff work for a privately owned company. However, I am sure that an answer to that question will be forthcoming. I particularly seek an assurance that at the end of the consultation period, which is only some six weeks away, the Minister will meet with the trade unions nationally, whatever the outcome of the consultation.

As regards method of sale, I note that the consultation document states in paragraph 26 that the, MoD is likely to retain initially a significant financial stake in NewDERA, as a means to ensure that taxpayers receive full value for their investment in past government funded research". That seems to me eminently sensible. The document continues: Retention of such a stake would not be a long term position". If this is a jewel in the crown, a national asset, and if it is to be highly successful in the private sector, as it may well be, why do not the Government retain a minority stake in it? I believe that Sir John Chisholm referred to a golden share in a communication to the staff, although I believe that it is referred to in the document as a special share. I am sure that that provision will be debated further.

This is the second consultation paper that has been produced on the proposal that we are discussing. I leave the Minister with the questions that I have posed, although many more will be forthcoming. I look forward to hearing the Minister say that the primary stakeholders, apart from the Government—I am sure that the Minister is capable of looking after the Government' interests—namely, the shareholders of the defence industries and the staff will be given the assurances that I seek either tonight or in the course of the next 30 days.

8.7 p.m.

Baroness Sharp of Guildford

My Lords, I echo the thanks of other speakers to the noble Lord, Lord Hogg of Cumbernauld, for initiating this timely debate on this important topic.

In the mid-1980s I was a joint author with colleagues at the Science Policy Research Unit of a brief article which appeared in a Lloyds Bank review and which suggested that Britain devoted too many resources to defence research and that defence research pre-empted scarce scientific resources which might otherwise go to the civilian sector. At that time defence research accounted for more than 50 per cent—that total was rising—of the total amount that the then government spent on research and development. Civilian R&D funded by the government of that time had fallen to 48 per cent of the total amount and that percentage was falling. There was considerable concern that Britain was not pulling its weight in the new technologies such as electronics and telecommunications, where it ought to pull its weight.

I believe that the criticism that I and some of my colleagues made at that time had an impact on the debate that occurred. Of course today things have changed considerably. MoD's funding of research has halved in real terms and is now down to 38 per cent of the amount that the Government spend on supporting research and development. In areas such as mobile telephony and the Internet, civilian research has more than caught up with military research and indeed has overtaken it in many respects.

But, as we recognised in the mid-1980s, these are also areas where civilian technology was rooted in military technology. If it had not been for the long years of public investment in these areas—not, by any means, entirely in the UK but around the world, particularly in the United States—there are many benefits which we would not be securing today.

In the meantime, defence establishments have been totally reorganised under the able leadership of Sir John Chisholm and are now integrated into the next-steps agency, DERA, which is the subject of today's debate. DERA, which was established in 1995, has proved itself to be both an effective and a significant player, not only in terms of the purchaser/provider split in the provision of military R&D, but also increasingly in the commercial area, where it is beginning to pull its weight. The question we are debating today is: where next with DERA? Is privatisation or part-privatisation the best way forward?

The case for privatisation is quite strong: it puts R&D at arm's length from the Ministry of Defence; it enables DERA to get the full benefits of being a commercially-based organisation; it gives it full flexibility in relation to recruitment of staff and payment of salaries out of the Civil Service net, which many regard as being a difficult net in which to work; it enables the organisation to go outside the public sector to raise the resources necessary to back up its vital investment potential; and, above all, it enables Her Majesty's Government to cash in on their equity, as it is estimated that privatisation would raise between £1 billion and £1.5 billion for the Exchequer—although I, like others, wonder why the Exchequer needs this extra money at a time when it is already sitting on a good £17 billion.

The downside of privatisation, about which we have heard a fair amount already, is that the Ministry of Defence needs expert and impartial advice. It needs it even more so with the Smart Procurement initiative. Wholesale privatisation of DERA will separate the customer from the contractor very nicely, but the danger is that it could leave the Ministry of Defence devoid of the expert advice on purchasing that it needs. As we all know, a poor purchaser gets poor value for money—arguably, a lack of knowledge in purchasing has already plagued the Ministry of Defence—and it is vitally important that DERA's resources are available to help in such purchasing.

Secondly, there are areas in which security issues demand in-house expertise rather than out-of-house expertise, and where control over knowledge is important—for example, in the biological warfare and germ warfare areas. There are also other important areas, such as intelligence gathering. It is vital that such knowledge should be in-house rather than out-of-house. The great danger with privatising DERA and pushing it down that route is that the knowledge is not there when the Ministry needs it in-house.

Thirdly—again, this has been raised already by other speakers—there is the whole question of collaboration with the United States. Collaboration is vitally important. We know now that technology transfer takes place through people talking together—not through passing bits of paper, not through blueprints, not through publications but through people being able to talk together. Collaboration is vital to the effective passing of knowledge.

As far as I can see, the Americans have made it quite clear that they are not prepared to collaborate fully with the United Kingdom if it is a matter of collaborating with a largely private sector organisation. They are worried that there will be leakage, not only in a military strategic sense but also in a commercial strategic sense—and, after all, DERA does have close links with BAe systems.

So what have we come up with? It seems to me that we have come up with a typical British compromise. We have basically split the organisation down the middle. The high security parts associated with biological warfare and Porton Down remain in the public sector; the key information gatherer, the Defence Research Information Centre, is to remain within the public sector; the strategic analysts—the key people in strategic analysis in the Centre for Defence Analysis—who are the backbone of this US collaboration system, are also to remain within the public sector. Approximately 3,000 DERA staff are to remain within the public sector and the remaining 9,000 are to go the route of the public partnership privatisation.

Perhaps the Minister can answer this question today: is this a viable option? Can we cut off what is, in many senses, the head of the organisation? Can we cut off the defence information and the big databases, the analysis of which is absolutely essential to the strategic function of the organisation? Can we cut off the strategic analysts, who are a key part of this organisation? Will it leave the organisation viable if we cut off its head—or will it go on running around like a chicken?

We are rather sceptical on these Benches. Our view is that the exercise is driven not by defence needs or defence priorities but, once again, by the Treasury and its desire to cut defence expenditure. By hiving off to the private sector the capital costs of providing defence R&D, the Treasury is saving money in the short term as well as bringing into the Exchequer kitty the nest-egg of privatisation.

But there are real questions to be asked about whether the private sector is prepared to fund the kind of long-term research and development that DERA undertakes. The British private sector is not well known for funding research and development even when it has a three-year pay-off, let alone a 15 or 20-year pay-off, which is the case with defence R&D. Is it really likely to support such R&D? I know we have had the dot.com revolution, but that seems to have got a bit pricked these days. Will the private sector be anxious to buy out DERA? Can we be confident that it will go on investing in DERA as we need to?

DERA is a very significant resource for Britain in terms of research and development. We do not have many research and development resources; are we really wise to sell DERA off to the private sector when the private sector's record is so appalling?

Secondly, will the Ministry be able to keep in-house the expertise it needs to be a Smart purchaser? Is there not a danger that scientists who are no longer working on day-to-day experimentation on the bench will rapidly get out of date and out of touch with leading edge developments? Again, all experience shows that keeping in touch through day-to-day experimentation enables scientists to keep their edge. The last thing we want is a whole lot of deadwood scientists sitting in the Ministry advising—perhaps badly—on purchasing. We question whether they will be able to keep their hand in.

Thirdly, do not the same arguments apply to those parts of DERA which are set aside for collaboration? If such people are not doing active research on the bench, will they be able to keep their knowledge at a leading edge? And, vice versa, will those parts which remain in the new organisation—which I believe is to be called the "New DERA"—be viable without the leadership that the strategic analysts have given them and without access to the data resources which have been an important source of DERA's research?

On these Benches, we have come to the decision that this hybrid, this part privatisation, poses many dangers and many risks. In moving along this route, we believe that there is a real danger of the Government killing the goose that has been laying some golden eggs for them. We believe that it risks leaving the Ministry devoid of top quality, honest and independent advice; that it risks killing the Smart Procurement initiative in its tracks; and that it is driven not by any rational argument for optimising the defence research function but by the Government's obsession with public expenditure headline figures.

DERA has moved a very long way towards opening up its research resources for the benefit of the nation. Dual-use technologies—commercial off-the-shelf technology systems—have brought many changes to DERA's working methods over the last decade. We believe that there is a strong case for leaving the organisation as it is within the public sector and investing in it as a public sector resource. However, this would require investment by the Government for the longer term. It is that investment, whatever the likely benefits, that this Government, like their predecessor, seem incapable of providing. Sadly, we believe that this decision yields yet another example of Britain's endemic short-termism.

8.20 p.m.

Lord Burnham

My Lords, the timing of the noble Lord, Lord Hogg of Cumbernauld, is immaculate in that having originally asked this Unstarred Question a month ago, he has now asked it again on the day when the Government have made an announcement on their plans for the future of DERA. I am sure that all noble Lords have read the consultation paper. As a result, the noble Lord's Question has taken on a rather different aspect. The Government have produced marvellous timing. They made the announcement on a day when technology stocks have taken a hammering. On this day, of all days, it may be considered that possibly selling DERA into the private sector is not a good thing.

The postponement of the debate on the noble Lord's Question was made for entirely understandable and acceptable reasons. It is not acceptable that the Government should choose this occasion and this debate to make a statement of such importance. In another place it has been done by means of a Question for Written Answer which is even worse. My honourable friend the shadow Secretary of State in another place is understandably less than happy about the way in which that House has been treated. Your Lordships have the advantage of the noble Lord's debate. But it is not good enough, and it must be considered that the strong suspicion is that the Government are trying to sweep this sale under the carpet. The announcement has been downgraded from a proposal that has been talked about in many areas to a consultation document. There is strong reason to believe that this has been done at the instigation of the Government of the United States. Thank goodness that they have done so.

In proposing a public/private partnership, Her Majesty's Government have resuscitated the remark of the late Lord Stockton that has been universally misquoted as selling the family silver. It is interesting that that speech should have been made about nationalisation. To quote this remark is better than to suggest a similarity with the other man who received 30 pieces of silver this week many years ago. At least he received all of it and did not have to hand 70 per cent of it back to the Treasury.

It is shameful that the defence budget should be in such a state that major considerations of security should be affected by the need to balance the books with the £250 million which the Minister will receive as a result of the sale of DERA. That £250 million is 1.5 per cent of the defence budget. Sadly, it is true that the need to satisfy the Treasury is seen by the Ministry of Defence and the Armed Forces as a whole as more important and urgent than hanging on to get DERA right.

There seems to be a serious and fundamental difference of opinion between the MoD, including the Secretary of State on the one hand, and two groups of Treasury officials on the other about the defence budget. One group is against defence expenditure per se, in support of so-called "socially valuable" expenditure. The other believes that the MoD is uncontrollably wasteful and that only constraints on budgets will do anything to remedy this.

When DERA was founded it was recognised that national security was of paramount importance and that to put DERA in the private sector would risk government to government security relations, particularly with the US. Since its prime function lies in the realm of independent evaluation and testing, the possibility of privatisation brought a suspicion that its impartiality would be compromised.

This Government have never clarified their position. What is the answer on the planned issue for intellectual property rights, or the financial structure and the legality under European legislation of the special purpose corporate vehicle? What does the proposed sale involve? Some DERA establishments, such as Porton Down and Malvern, are highly sensitive. The Government have only said in their proposals that they may be kept in the public sector, a point admittedly covered in paragraph 6 of the consultation document.

Can the noble Baroness the Minister give an assurance that the delay in the decision on Heavy Lift and on BVRAAM is not being affected by the proposed sale of DERA?

At present the MoD is both the owner and the main customer of DERA. As the main source of independent advice and evaluation to the MoD, it is essential that it continues to be regarded as wholly impartial both by the industries with which it deals and by foreign governments. There is a close relationship with the American defence industry. It is unlikely that the Government of the United States would be as willing to share their secrets with a commercial organisation. This is not new. In the past, difficulties have been experienced with US industry where the US Government do not own the IPR rights. The French Government, too, will not deal with private foreign organisations.

It seems that it is US pressure that has forced the downgrading of the PPP proposal to a consultation document. Undoubtedly, the US will pull some of the work if DERA is privatised. I ask the Minister if she will be going to America next month to discuss this particular problem?

It is hard to overstate the deterioration in the relationship between DERA and British industry that will follow privatisation. Already the limited amount of commercial work being undertaken has damaged the relationship between DERA and industry. The National Audit Office report states: Our unique position of trust and impartiality has been damaged". It goes on to state that industry now realises that DERA is to be trusted and not regarded as a competitor. But would it continue to do so if DERA were privatised?

Why have things been going wrong and why, in some areas of the MoD, are there pressures for a degree of privatisation?

First, there is a management problem. Too many senior managers now regard themselves as superior consultants—very profitable, too—and have left their departments largely unmanaged. Without doubt, senior staff will benefit substantially from flotation on the market. What role will Sir John Chisholm play in the new organisation? Will he be in any way constrained from relationships with other commercial organisations.

Secondly, there is understandable frustration in the MoD about delays in getting solutions out of DERA. There are too many cases where DERA has endlessly sought perfection where the needs of defence would have been much more quickly and almost equally efficiently satisfied by buying equipment off the shelf. It would not have been perfect but it would have been in service. Ministry officials have said that now is the moment to stop; they need the kit. But in so doing they have entirely destroyed the basis on which research and evaluation are carried out. It may seem strange for the Conservative Party to attack privatisation but in this case privatisation will destroy the relationship between the Ministry of Defence and the defence industry. The Labour chairman of the Commons Select Committee summed it up best in his reported comments: Only the British would be stupid enough to sell their sensitive military research, possibly to a foreign company". The timing of the decision, not only in terms of what has been going on today on the Stock Exchange, is also extraordinary. Sir Keith O'Nions is newly in post as chief' scientist. When he was interviewed by the Select Committee he made it clear that he needed time to decide how defence science should be conducted. As a loyal servant of the Government, he will no doubt accept today's announcement, but it cannot make him happy. Can the noble Baroness give an assurance that he will be fully involved in all the details of the change of ownership, management and the conduct of affairs? The same applies to Sir Jeremy Blackham's board which would seem to be undermined by current events. The work of the board was clearly set out in the SDR. Now the Government are going across what they said then.

Even this Government have realised that some parts of DERA are too sensitive to be included in the sale, such as Porton Down and Malvern. What about Boscombe Down? Do the Americans control that? The Government must think again if there is not to be the most disastrous debacle in the history of defence procurement. I have not even touched, and will not touch, on the loss of jobs.

With no disrespect to noble Lords who have taken part in the debate, the Benches are empty where, had the nature of the debate been known earlier, other noble and noble and gallant Lords might well have played a part. I hope that the Minister can give an assurance that both in your Lordships' House and in another place we may have the opportunity of debating the matter more fully.

8.31 p.m.

The Minister of State, Ministry of Defence (Baroness Symons of Vernham Dean)

My Lords, I am grateful for the opportunity offered by the Question of my noble friend Lord Hogg of Cumbernauld to debate the future of the Defence Evaluation and Research Agency and to hear, for the most part, the valuable contributions made by those present today. I should like to thank my noble friend for initiating the debate and everyone who has participated in it. I am also pleased that so many noble Lords who have spoken recognise what a valuable asset we have in DERA and what an important part it can play in the new economy, provided we can give it the right opportunities.

Like the noble Lord, Lord Brett, I was interested and not entirely pleased to see the coverage of the issue in the weekend press. I understand that there were no official briefings to the press on this issue over the weekend, but of course staff were told on Friday to expect briefings today. It is entirely right and proper, as the noble Lord pointed out, that staff are given as much notice as possible, and we wanted to be as open as possible. It is one of the elements of such openness that journalists draw their own conclusions. After all, a great deal has been put into the public arena on this issue, so it is not entirely surprising that some of the journalists' conclusions have been accurate about what the Government's conclusions were likely to be. That is not particularly remarkable.

To answer some of the points raised by the noble Lord, Lord Burnham, the Question of my noble friend Lord Hogg was postponed because I asked him to postpone it as I was away. This is an issue with which I have dealt and which falls particularly within my ministerial remit. My noble friend was kind enough to postpone his Question. There has been no sweeping of anything under any carpets. The Question was answered today by Written Answer in another place. It was referred to during defence Questions which took place today in another place. A consultation document is before your Lordships and everyone else. I assure noble Lords that all contributions will be welcome.

Perhaps I may say to the noble Lord that I also deal with the issue of Heavy Lift and BVRAAM. The two decisions—those decisions and this one—are entirely free-standing. They are in no way connected. I give the noble Lord that assurance as the Minister who deals with both. Perhaps I may say to him with regard to another point he raised that Sir Keith O'Nions and Sir Jeremy Blackham both sit on the working group which I convened to consider the future of DERA. The recommendations of that working group were unanimous. They were unanimous not because one went round the table and some people disagreed and then I asked for a unanimous recommendation. They were genuinely unanimous.

We have been working on a way forward for DERA for the past two-and-a-half years. One of the reasons it has taken this long is the complexity of the subject and the number of interested parties. Often the stakeholders we have consulted have had very specific and quite different views and interests. In the face of such complexity it was important that we fully explored the key issues. We were determined to get this as right as we could in order to ensure a successful future for DERA.

I shall try to explain to my noble friend Lord Hogg of Cumbernauld, and perhaps as importantly, given some of the things he said, to the noble Lord, Lord Burnham, why we believe that DERA needs to move on from the structure that has underpinned the successes of the past five years. DERA's core business from the Ministry of Defence, about half of which is research, has declined significantly over the past 10 years, a point made by my noble friend Lord Faulkner of Worcester. That is not because we do not rate the value of the science and technology that DERA produces; far from it. It is largely because our procurement process has moved away from buying individual commercial components and integrating them with home-grown equipment developed in DERA laboratories. Instead, we require our prime contractors in industry to be responsible for providing us with fully-integrated systems. This reduces the risk of delay and ever-increasing costs by placing the burden of risk on industry to get it right first time. That lies at the very heart of our Smart Procurement Initiative.

In addition, as the noble Baroness, Lady Sharp of Guildford, told us, the balance of research for defence is changing. The civil sector now leads in many areas of technology which are also relevant to defence needs. For example, the work the civil sector is doing in biotechnology, communications and computing has a significant impact on military requirements and doctrine. If we do not find ways for defence to take advantage of this work as early as possible in the development cycle, our Armed Forces are bound to be the losers. The way to address the impact of this decline in DERA funding is not to call for its reversal. If I may say so, the point made by the noble Lord, Lord Burnham, was very short sighted because it ignores the changing environment in which we operate. The answer is to find a way of allowing DERA to become fully involved in the wider science and technology base. That is not only good for DERA; it is good for the MoD because it ensures that DERA can bring a wider expertise to meeting the requirements of the Armed Forces. It is also good for the UK as a whole as it allows DERA to exploit the treasure trove of knowledge and ideas that it possesses to the benefit of a wider market than its traditional defence customers. In this way DERA will be able to make a growing contribution to the country's economy. I assure the noble Baroness, Lady Sharp, that those are the genuine reasons why we announced in the Strategic Defence Review that we would take advantage of the opportunities offered by a public/private partnership approach for the future of DERA.

Initially, as my noble friend Lord Faulkner said, 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 and our international partners' security interests were properly protected. Following extensive and entirely genuine consultation on this proposal last summer, it became apparent that this was not the best approach. Strong concerns were expressed by a number of stakeholders, not least the UK's own industry and our international allies. These concerns focused on the need to retain in the public sector specific activities concerned with the integration of world-wide science and technology knowledge, the provision of an in-house source of impartial advice and responsibility for the integration and management of the research programme and international research collaboration.

Following last year's consultation, we looked at two possible ways of dealing with the problems identified during our initial consultation process. The first involved setting up virtually the whole of DERA as a plc but selling only a minority share in the organisation. The second involved an approach which would see about three-quarters of DERA's staff forming a company which would transfer to the private sector, with a core group of staff retained within the MoD for strategic reasons.

We concluded that the first approach simply would not work because it failed to address adequately concerns over sensitive and high-level policy and competition-sensitive work being carried out in the private sector. We have, therefore, concentrated on finding a solution that would allow us to retain the most sensitive areas of activity within government so that the remainder of DERA could be placed in the private sector in a way that enabled it to provide to the MoD all research relevant to defence needs and ensured it a future as a prosperous, growing force for the national economic good.

That does not mean that we have not been very conscious of the concerns that have been raised by our decision to pursue this option. Indeed, many of those concerns have been voiced by your Lordships during the debate. I also understand why DERA's own staff were worried that, if we split the organisation in two, we might destroy something that has become a real success—as most noble Lords have been kind enough to acknowledge—over the past 10 years, and indeed a genuine asset of which the Government are justifiably proud.

What we have done, therefore, is to devise a way of preserving within government the resources necessary to carry out the most sensitive functions and to provide the MoD with impartial high-level advice, while at the same time leaving within DERA the capability to maintain the full range of current activities—from laboratory-based research and testing through to providing carefully packaged advice to customers in the MoD and elsewhere. That important point was raised by the noble Baroness, Lady Sharp of Guildford.

I now turn to the points raised by my noble friend Lord Hogg of Cumbernauld and the noble Lord, Lord Burnham, about reaction from the United States. A great deal has been said about the reaction of our United States allies, much of it not particularly accurate. Some people believe that we are taking too much notice of the views of the United States; others believe that we are not taking enough notice. I was a little concerned as to which the noble Lord was most worried about: whether I was taking too much notice of the United States or whether I was not taking enough notice.

Lord Burnham

My Lords, I thank the noble Baroness for giving way. I do not see how she could have thought I was suggesting that we were taking too much notice.

Baroness Symons of Vernham Dean

My Lords, I thought that the noble Lord indicated towards the end of his address that possibly we had bowed too much to what the United States was saying. I assure the noble Lord, if he is worried—as his honourable friend in another place expressed himself to be worried in a Radio 4 interview this morning—I have talked face to face with United States politicians and officials on this issue. The noble Lord, Lord Burnham, asked me when I should be going to the United States to do so. I have already been to the United States specifically for that purpose. I have also discussed the issue with our friends and colleagues in Australia, who also had some concerns about the original reliance option.

The United States faces much the same challenges as we do. It is certainly not standing in the way of a PPP for DERA. We have listened to the comments of the United States on this issue, just as we have listened to the comments of our other allies. We have listened to the comments of UK industry, and of DERA, and of MoD staff. Not only have we listened; we have taken them into account in putting forward these revised proposals—a genuine revision of proposals in the light of consultation. I am confident that the "core competence" approach will be welcomed by the majority as the best way forward.

Let me now say something about the core competence model in detail. It is our preferred model. We detailed it today in a consultation document under the title, Core Competence. It 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 a 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 been made yet, but we would expect the number of staff within the retained elements to be fewer than 3,000.

The elements retained in the MoD would, therefore, provide a high-level overview across the whole spectrum of science and technology currently addressed by DERA. That would ensure that the MoD has 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. This capability would be focused on those activities that must be carried out within government.

The remainder of DERA, which noble Lords will see referred to as "New DERA" in the consultation document, would consist of about 9,000 staff. It would continue to be a major supplier of science and technology to the MoD but essentially with the freedom to develop its business for a wider range of customers in the defence and civil areas.

This approach would create two vibrant, sustainable organisations. The new company would have the freedom to flourish, to grow its business and to diversify the wealth of knowledge it has built up over the years, to the benefit of the wider UK economy, while still providing the MoD with the essential services that we shall continue to need long into the future. Indeed, we should expect this organisation to become a globally branded technology company. I do not share the pessimism of the noble Baroness, Lady Sharp, on that issue. We already have an indicator of just how successful it might become in the success of the recent joint venture between DERA and NXT to exploit speech recognition technology. The retained organisation will be a small but also, importantly—I stress this—a world-class organisation offering rewarding careers within the MoD and the wider Civil Service.

The delivery of this vision is dependent to some extent on how DERA is placed in the private sector. The most sensitive activities are to be retained in the MoD. That will allow us to minimise the constraints under which DERA can operate. That will, in turn, create an environment that permits full exploitation of its potential.

We envisage the process beginning with DERA's incorporation as a plc. This could be followed fairly swiftly by a flotation, as soon as DERA has reached a suitable stage of development. This could be as soon as 2001. All of this would take place under the leadership of its current chief executive, Sir John Chisholm. I should like to take this opportunity to pay tribute to Sir John—the man who formed the DERA that we know today against all the advice of those who thought it was impossible. Sir John has constructed an agency that has produced real efficiencies and benefits. I am very pleased that he is to lead the new DERA.

It is likely that the MoD would retain initially a significant financial stake in DERA. This would ensure that the taxpayer received a share of what we believe will be the increasing value of the new company as it builds upon and exploits its impressive legacy of government-funded research. In answer to the question raised by my noble friend Lord Brett, the decision as to when the MoD will dispose of its stake in the business will depend on market conditions and the speed with which the company establishes itself as a commercial organisation. It is a little early for us to anticipate that yet.

Obviously, detailed work would be needed to refine the implementation of the core competence model and to decide how the MoD-retained elements in DERA will operate. We are now embarking on a six-week period of consultation to determine the views of our stakeholders. We shall not take any final decisions until we have heard those views. My noble friend Lord Brett raised a number of points which I shall endeavour to deal with. I assure my noble friend that this is a genuine consultation exercise. It will come as no surprise to many noble Lords who know our histories that my noble friend and I share something of a common past in our trade union affiliations. I am clear that such a period of genuine consultation is enormously important.

A number of noble Lords, including my noble friend Lord Brett and the noble Lord, Lord Hogg of Cumbernauld, were concerned about job losses. Over the next few years there must be adjustments in both the retained element and the new company as they adapt to changing demands, and that will probably have employment implications. However, that is not new. My noble friend Lord Brett is aware that this has occurred, and is occurring now, in DERA as the balance shifts from the more traditional defence technologies to the new information technologies. Therefore, the issue is before us in any event.

My noble friend also asked about pensions. In this process it is important to safeguard the terms and conditions of employment of those who transfer from the public to the private sector. That will be achieved by structuring the PPP to ensure the transfer of undertakings. In that context my noble friend and I are familiar with TUPE, which will apply in this case.

My noble friend also asked about the position of military officers. I remind him that we already have arrangements under which military staff work within private sector companies such as BAe Systems. We are confident that similar secondment arrangements can be put in place as far as concerns DERA.

My noble friend Lord Faulkner went into a good deal of detail. I was pleased to hear of his highly successful visit to Malvern. A number of DERA's sectors have staff based on the site at Malvern. As we have not yet completed the detailed breakdown of staff between the retained DERA and the new company, it is not possible to be definitive about the splitting of the Malvern staff between the two organisations. We expect that division to be refined during consultations. As I have indicated to my noble friend Lord Brett, that will be genuine consultation. My noble friend Lord Brett and the noble Lord, Lord Burnham, were concerned about intellectual property rights. Those rights are owned by the MoD and we foresee that they will pass to the new company, with reserved rights for defence use.

I hope your Lordships agree that what I have set out tonight are the results of genuine consultation on an imaginative and potentially highly successful way forward for DERA. We have listened carefully to all commentators and stakeholders, and the proof of that is in the revised documents that are before your Lordships. We believe that what we now propose meets the concerns of those who felt that some of DERA's activities were simply too sensitive for the private sector and, at the same time, offer the opportunity for us to create a world-class company that is able to exploit technology in partnership with civil industry and, consequently, to invest not only in people but in facilities and science to the wider benefit of wealth creation in the United Kingdom.

House adjourned at eight minutes before nine o'clock.