Oral evidence: Future of the Food and Environment Research Agency, HC 1070Wednesday 25 February 2015
Oral evidence, 25 February 2015.
Witness
Lord de Mauley, Parliamentary Under-Secretary of State for Natural Environment and Science, Department for Environment, Food and Rural Affairs, gave evidence.
Chair
Lord de Mauley, thank you very much for joining us again, I think for the last time in this Parliament, but you never know. This is an interesting development, and I think you heard me say that our principal interest is to ensure that UK science is properly protected in this deal. First, can I test the water, as I did with the first panel? In the ministerial statement of 11 February, it says: “It is intended that the new joint venture will commence on 1 April.” Do you think that that is now a certainty?
Lord de Mauley
It is certainly our firm intention. If anything, it is looking more likely rather than less likely, but of course, as your previous witnesses indicated, nothing is certain until it is certain.
Chair
In the ministerial statement, there was a reference to freeing FERA from public sector constraints. Most members of this Committee will understand what is meant by that phrase, but perhaps, for the record, you could explain what you think it means.
Lord de Mauley
Yes, of course. Those constraints include three things. One is the ability to market your services proactively. Another is to pay your staff at the market rate, and a third is to finance your business, for example, through borrowings, which is obviously that much more difficult in the public sector. The fourth thing, which your previous witnesses mentioned, is access to research council funding, in this specific instance.
Chair
And any such borrowing, presumably, would be outside the PSBR.
Lord de Mauley
Correct.
Chair
Leaving aside aspects like that—obviously, the Treasury have a close interest in points like my last one—what are the problems with the current model?
Lord de Mauley
FERA has a turnover of about £40 million, and it has about 550 staff. Income from public bodies in 2013-14 represented about 66% of that, with 18% coming from commercial customers. FERA’s revenue from the UK Government is expected to fall over the next few years, largely from ongoing pressures on departmental budgets. A business review in 2011 highlighted FERA’s success in growing commercial income and noted that there was potential to grow it. Also, at the same time, we were moving into a situation where FERA was loss-making, and under Government ownership it was difficult to see it finding its way out of that situation.
Chair
In the Government’s statement, there is the laudable goal that the new joint venture would “protect and enhance” FERA’s science capabilities, and we all applaud that, but where is the evidence? How is that going to be achieved?
Lord de Mauley
We share your imperative that we should protect and enhance Government science. We are doing it in three ways: first, by choosing the right partner; secondly, by ourselves remaining a part owner; and, thirdly, in the science we pay for as a customer of FERA. First of all, in terms of choosing the right partner, we have used a comprehensive procurement exercise, which I can explain to you, if you wish, to find a partner with a science strategy aligned with the high standards and reputation of FERA’s scientific capability and our ambition for its science. Our ambition is for it to provide innovative, relevant and high-quality science to help meet our fundamental need for sustainable, long-term access to innovative science, so we asked each bidder for its science strategy for FERA, and we evaluated this on its alignment with our ambition. Capita’s bid scored highly, in particular because of its proposal, which you have heard about, for a joint research institute with Newcastle, which is part of the Russell Group, and currently ranked fifth in the country for the number of knowledge transfer partnerships. Moving on to remaining ourselves a part owner, as a minority shareholder, we clearly will be at arm’s length to allow the joint venture the freedom to act commercially, but we will still have influence through our 25% holding and, importantly, through our two directors on the board, who will be our chief scientific adviser, Professor Ian Boyd, and our director-general responsible for animal and plant health, Nick Joicey. They will have a role in providing support and challenge around the science strategy, and thus the science direction in the joint venture. The third thing, specifying what we need as a customer, is that we can protect our interests by specifying and paying for the science and science capability we need through the long-term service agreement, and ensuring we get what we want through proper contract management.
Chair
The board to which you referred is the joint venture board, is it?
Lord de Mauley
Yes.
Chair
We will come back later to explore more about the institution. It has been a long process. Originally, the Government announced that it was all supposed to be sewn up by the end of last year. What are the reasons for the delays?
Lord de Mauley
It has been important to get it right. We have gone through an extensive pre-procurement exercise, which I referred to earlier. From my experience in the private sector, where my business for 20 years was doing these sorts of deals, I have to say that I was very satisfied that it was very professionally and thoroughly done. I am sure you would make the point to me that we should not rush these things. In the circumstances, it has been very professionally done and I am very satisfied with the result.
Stephen Metcalfe
This Committee has previously expressed concerns about the way the Forensic Science Service was—for want of a better description—disposed of, and although we were led to believe that there was some strategy behind that, when we scratched the surface a little bit more and dug a little bit deeper, we discovered that there really was not. Although you have said there is a strategy, can you expand on what it is in terms of the regulation, innovation and commercialisation of FERA that will make sure that we are not in a tricky place in a year, or in two years’ time?
Lord de Mauley
I absolutely understand the concern, and it might help if I explain how we used the experience we gained from previous deals in steering ourselves through this course. You mentioned the Forensic Science Service, quite rightly. We were, of course, conscious of the failure of that, where concerns were raised about the maturity of the forensic market and the Forensic Science Service moved to a GovCo. Perhaps the difference is that FERA already operates in a commercial marketplace so it can take advantage of the greater commercial opportunities from a joint venture. There were others that we looked at, like the National Physical Laboratory, which was a Government-owned, contractor-operated model, and then its recent move to a new partnership arrangement with two universities, Strathclyde and Surrey. That helped us think through how to put the quality and sustainability of the science at the heart of the deal. We were also conscious of the conclusions of the NAO inquiry into the QinetiQ privatisation. Reflecting that, the management of FERA were kept at a distance from the proposition and negotiations. We included a super-profits clause to take a cut back for Government if the joint venture became successful. There were a number of other situations which we took into account when steering ourselves through these negotiations. We have done that extremely carefully.
Stephen Metcalfe
One of our concerns around the way the Forensic Science Service was dealt with was the lack of involvement of the chief scientific adviser, it is fair to say, almost all the way through the process. Can you reassure the Committee that the science—research is in the name of the organisation—was at the heart and centre of this, and that the chief scientific adviser was involved all the way through?
Lord de Mauley
I absolutely can. He and I talk regularly about a whole range of DEFRA matters, as you can imagine, including FERA. He and I have been up there several times, and we have both been kept thoroughly involved in the process.
Stephen Metcalfe
Thank you very much. If I can, I would like to move on to the area of ensuring that the Government still maintain the benefits of FERA. We heard from the first panel that there is a service level agreement between the two sides. Are you confident that the Government’s requirements will always be met, above all else?
Lord de Mauley
Yes, I am. It is important to say that there is a clear and comprehensive contractual process to address any issues of poor delivery. One has to think of the worst and plan for that. First of all, there is a series of regular meetings which go on at a senior level to monitor progress. If a problem arises, it will initially be handled at the level of the service recipient—plant health, veterinary, medical directorate or wherever. If a failure is identified, financial consequences can kick in quite quickly. Both sides will do their best to fix the failure. Three successive failures will trigger an urgent meeting within a week of the third failure. I am going into a lot of detail, but I hope it is helpful for you to understand the consequences. Things can be escalated further, including an emergency meeting which involves looking for a rectification plan and is triggered by a series of breaches. Ultimately, the call-off in question can be terminated and, even in extremis, the framework. The core capability in the joint venture, which DEFRA is committed to fund, would, in those circumstances, ultimately return to Government, ensuring that vital skills would not be lost.
Stephen Metcalfe
That is if there is a breakdown in the relationship and the new organisation is not providing ongoing services in the way you want. What happens in an emergency? If you suddenly need all those resources directed in one particular area, how will you make sure that DEFRA’s requirements are met above all else?
Lord de Mauley
Responding to incidents and emergencies will continue to be of the utmost importance, and Capita completely understands that. They understand their responsibilities and we are contractually assured that, as now, work to deal with emerging issues will be given the highest priority. In the short term, they will comply with our existing contingency and emergency requirements, and they are required to maintain short notice capacity. They are working on a new contingency plan, which will be more encompassing, and we are working with them. That will be required to be in place within 90 days of when the contract takes effect. It will set out the response we expect within the new contractual relationship. We also have a critical performance indicator covering incidents and emergencies, failure of which leads to significant financial reimbursement and triggers additional performance monitoring.
Stephen Metcalfe
Does it anywhere in the contract actually stipulate, categorically, that Government work needs to take priority over other commercial clients?
Lord de Mauley
Essentially, yes, because it is done in the way that I have described, which says that those are absolutely to be treated as—there can be no failure.
Stephen Metcalfe
Yes. They are slightly different. I completely agree, but it does not actually stipulate, “We will let everything else down before we let you down.”
Lord de Mauley
I think that is the effect of it. Our intention in the negotiations has been, essentially, that that situation pertains.
Stephen Metcalfe
You are confident, and your advisers are confident, that that is the case.
Lord de Mauley
I am very confident that they will not let us down.
Stephen Metcalfe
Good. Thank you for that. As I said to the previous panel, the biggest asset the new organisation will have is its staff. Obviously, everyone finds change unsettling. Since the announcement, has FERA had problems with recruiting and retaining staff?
Lord de Mauley
The staff have been kept thoroughly informed throughout the process. Indeed, compared with a private sector process, which I am more familiar with, this has been one of the more open ones I have encountered. Indeed, staff have reacted extremely positively. I do not have an up-to-the-minute answer to the question you are asking, but I am not aware of any problems.
Stephen Metcalfe
You are not aware.
Lord de Mauley
No.
Stephen Metcalfe
You have not, therefore, taken any steps to prevent the loss of skilled and experienced staff, because you are not aware that there has been a problem with that.
Lord de Mauley
The impression we get is that, if anything, it is in the positive direction.
Stephen Metcalfe
Because of the announcement and the excitement around the potential.
Lord de Mauley
It has become a more attractive place.
Stephen Metcalfe
Okay. That is good. Let’s hope that there is this bright future for the new organisation. I am sure we all wish that. I am not trying to sound sarcastic in any way. We heard from the first panel, and you heard it too, that there will be some changes in the back-office function. Have those changes and the potential reduction in headcount been discussed up front? Does it form part of the negotiations that there will be a reduction in staff?
Lord de Mauley
Nothing has been withheld, but it is quite early days for Capita to decide exactly what they are going to do. Inevitably, they are going to look to restructure the business so that they can meet their new business plan. In particular, they will be looking to enhance operational efficiency through implementation of new and improved business support systems. One can expect this to have an impact on back-office jobs, although they are committed to no job losses in the first six months, to give them time to really get a feel for the business.
Stephen Metcalfe
Is that not stipulated by the TUPE agreement as well?
Lord de Mauley
Everybody is subject to TUPE, of course; yes.
Stephen Metcalfe
I think that the six months is part of any TUPE agreement. As I said, we want this to work, but, in the event that it does not, do you have contingency plans in place through the contract to bring all scientists and other staff back into and under Government control?
Lord de Mauley
Those who are necessary to perform whichever function it is, yes.
Pamela Nash
Good morning, Minister. I would like to ask you a couple of questions about the processes that were in place for the Department to choose partners for FERA in the future. Can you share with us the criteria that were applied to the applicants, and can you tell us more about who was involved within the Department for determining those criteria and going through the application process?
Lord de Mauley
Can I run through the procurement procedure? I think it might be helpful to the Committee. The procurement for the joint venture was an undertaking using the negotiated tendering procedure, and a notice was placed in the Official Journal of the European Union on 4 May 2014. Forty-three organisations expressed an interest, of which 15 attended meetings with DEFRA as part of a market soundings exercise. Six bidders completed a pre-qualification questionnaire, and four of them went through to the pre-qualification stage. The deadline for bidder responses was midday on 5 December. Bidder responses received were opened on 5 December, and these were checked for compliance and the clarifications required to enable them to be evaluated. Throughout the process, all the bidders have been treated equally and have been given the same opportunities to learn about the FERA business and tailor their bid appropriately. There were bidder days when they were all given an equal chance to meet the FERA executive team. There were negotiation sessions. There was access to a common data room of information. The tenders were evaluated by an independent panel, all of whom had signed a non-disclosure agreement and confirmed that they did not have conflicts of interest. The evaluation process was undertaken in a completely fair and transparent way. Ultimately, that independent panel scored Capita with Newcastle University highest.
Pamela Nash
On what criteria?
Lord de Mauley
The criteria would have been science, first and foremost, including ability to fulfil all our requirements, financial, and then a range of other business criteria. I guess those were the two key ones.
Pamela Nash
Is there a formal list of criteria?
Lord de Mauley
I can certainly let you have it. I haven’t got it here. I have given you the process that we went through. I will let you have that afterwards, if I may.
Pamela Nash
Yes; thank you. Was the Department’s chief scientific adviser involved in that process?
Lord de Mauley
Yes, he was. His deputy was on the panel. You were asking specifically who was on the independent panel.
Pamela Nash
His deputy was, but the chief scientific adviser would be—
Lord de Mauley
He would be kept closely informed.
Pamela Nash
You mentioned that the science ability would have been in the top criteria that were used. Can you share with us any information and evidence that Capita presented in the application process to show their capability in providing science services?
Lord de Mauley
Yes. I have described a bit about the process that was gone through. What was really important to us, and the reason why their bid scored particularly well, was the proposal for a joint research institute with Newcastle University. This will help to ensure the quality of FERA’s science by rooting the organisation in the UK research base; you heard a bit about that from the previous witnesses. The criteria we set were heavily weighted towards protection of our science, and meeting our service requirements. I can now tell you that the key criteria were financial, science and service quality—that is the one I should have added.
Pamela Nash
You mentioned in an earlier answer applicants having to sign a non-disclosure agreement at a certain stage in the process. Why was that felt necessary?
Lord de Mauley
I think I said that—I mean—
Pamela Nash
It is my understanding that applicants had to sign that agreement before they were allowed to view the initial information document. Is that normal practice in DEFRA?
Lord de Mauley
Yes. Absolutely, it is.
Pamela Nash
So there is a precedent for that to happen.
Lord de Mauley
In this case, it gives DEFRA, the Government, more control over the process if we bind them to a confidentiality obligation.
Pamela Nash
Could you expand on that for me? Why is that?
Lord de Mauley
First of all, there is some intellectual property which FERA owns, and we do not want to give away our commercial secrets, so it would be entirely inappropriate for them to do that. That is just an example.
Pamela Nash
Are there any other reasons?
Lord de Mauley
When you are conducting a negotiation, you want to be in control of the process. To the extent that people are permitted to talk to each other outwith that, it can prejudice that process.
Graham Stringer
I will not repeat the question, but you were present when I asked the previous witnesses to explain the financial arrangements, the £20 million, made up of the £14.5 million and the £4.5 million. Were you happy with their answers? Did you agree with that, and is there anything you want to add?
Lord de Mauley
No. I was happy with their answers.
Graham Stringer
The Government have said that they estimate that they are committed to £15 million in the first year of the joint venture. Is that still the case?
Lord de Mauley
On the services of the business.
Graham Stringer
Yes. And that remains the case.
Lord de Mauley
Yes.
Graham Stringer
How far into the future do you project that financial commitment?
Lord de Mauley
From memory, I think we are committed for five years.
Graham Stringer
Is that £15 million in cash terms or real terms?
Lord de Mauley
It declines over the five years. That is pre-agreed.
Graham Stringer
If you do not have it in front of you, do you think you could send the Committee a note on that?
Lord de Mauley
Of course I can.
Graham Stringer
Can you outline to the Committee how DEFRA’s funding commitment to FERA will change over the course of the contract with Capita?
Lord de Mauley
Could I include that in the answer to you?
Graham Stringer
Certainly. With more difficulty really, we saw that things, because of the market change, went wrong with forensic science. What happens if there is a funding shortfall, if the budgets don’t go according to plan? Whose responsibility is it to plug that gap?
Lord de Mauley
Do you mean Government funding?
Graham Stringer
No. If the financial plans of the institute and the joint venture don’t work, because the world changes often, whose responsibility would it be to plug any gap?
Lord de Mauley
It would be Capita’s responsibility. It would be up to them as to whether they could do it from within the joint venture. If not, they would be required to do so themselves. I have explained to you the escalation procedure for when things go wrong. First of all, there are financial penalties in there and ultimately, if push comes to shove, the function has to be brought back into Government. In answer to Mr Metcalfe earlier, I explained the process for bringing staff back into Government. I should clarify that they would be specific to plant health—the staff who would come back.
Graham Stringer
Finally—this is the same question I asked the previous panel—when the Government were discussing these proposals, what did you see as the biggest potential risks and downsides? In a Committee like this, we are bound to hear the positive case. What were the worries?
Lord de Mauley
That was one of the things foremost in our mind, which is why, for example, we looked at other similar Government transactions that had not gone well and we asked ourselves why. We have written into the contract ways to obviate those. The contract is very clear that Government science is protected. The bigger question is whether the commercial upside is realised. I have explained that FERA is already getting 18% of its revenue from the commercial world. We and Capita are convinced that that is a growth market, so we think the risks are on the upside there. All I can do is assure you that we have spent this time—the Chair mentioned that it has taken a bit longer—making sure that we have dotted as many i’s and crossed as many t’s in contractual terms as we possibly can.
Stephen Metcalfe
I just want to go back to the issue of the staff transferring back into DEFRA if necessary. You have now qualified your remarks by saying that it is the plant health staff.
Lord de Mauley
Yes.
Stephen Metcalfe
What about the others, such as animal health and those sorts of areas?
Lord de Mauley
Other services can be sought elsewhere in the market. Our view is that it is plant health where the services are more unique.
Stephen Metcalfe
If it were all to go wrong—you always have to plan for the worst case scenario—and it went wrong at the same time as there was another outbreak of something like foot and mouth, you could go out and buy those services.
Lord de Mauley
To some extent I think you can, but I am confident that we will be able to do it from within the joint venture.
Stephen Metcalfe
Okay. As I say, you have to plan for the worst; that is why they are called worst case scenarios and we have the national risk register and things.
Lord de Mauley
If I may, may I consider that point and write you a note?
Stephen Metcalfe
Okay. That is fine.
Jim Dowd
Good morning, Minister. I would like to look at R and D for a moment. It is difficult to define from the latest annual report precisely what percentage of FERA’s income is actually spent on R and D at the moment. Do you have any idea? Information is arriving.
Lord de Mauley
But not on that particular question. I won’t make a guess. I will write to you on that particular point.
Jim Dowd
Fine. That may well affect my second question. How will this proportion, whatever it may be, be affected by the joint venture?
Lord de Mauley
As well as providing commitments to a number of specified services, we, DEFRA, have also committed to commission a minimum level of R and D per annum as part of the service requirement, which starts at £1.5 million in year one, and is focused on delivering new science for DEFRA’s policies, and underpinning and improving other services. In addition, FERA can bid for additional funding from DEFRA and other sources. Maintaining a level of competition for R and D funding is, as you have identified, important to ensure that we continue to receive the best solutions.
Jim Dowd
But without knowing the first figure, of course, you don’t know whether that is more or less than is currently being spent, do you?
Lord de Mauley
I think I am going to have to write to you.
Jim Dowd
Okay. I’ll look forward to that. What steps is the Department taking to ensure that Capita continues to invest in R and D and maintain FERA’s research capabilities?
Lord de Mauley
In addition to the joint venture itself, which I have just described but which we will come back to, the joint research institute is perhaps the entity that is most exciting from that point of view; it is a new creation and will do more blue sky research than has been done until now. That indicates to me that there will be more research rather than less research going on.
Jim Dowd
Let’s hope that is the case. The object of the exercise is obviously to undertake research, but there is nothing in the contract, in the agreement—or is there?—which compels Capita and FERA to ensure that it remains in the UK. What is to stop them, for example, closing research facilities in the UK and obtaining the same from overseas?
Lord de Mauley
You heard the conviction of the previous witnesses that FERA would form the nucleus for an agricultural science community in the north country, and I think that is a very compelling story. We have some of the best scientists in the world. They are here. Capita is coming here because we are here. They are not going to another part of the world, chasing their scientists. That is what makes me confident that they will stay here.
Jim Dowd
That may well be the practicality of it. Let us hope that is indeed the achievement, but there is nothing in the contract which says that the R and D has to take place in the UK, is there?
Lord de Mauley
There is, I understand, a specific restriction on offshoring scientific capability in the contract, yes.
Jim Dowd
Okay. Perhaps, along with the other notes that you are sending us, you could detail exactly what the position is.
Lord de Mauley
Of course, I will.
Graham Stringer
This is the same question I asked the previous panel, but I would be interested in your response. What will the institute do that FERA currently does not do?
Lord de Mauley
At the moment, most of FERA’s research is applied. What the institute will be doing is the blue sky research—the more basic research. I cannot tell you exactly what they will do. By the nature of blue sky science, I guess that will pan out when they set the institute up.
Graham Stringer
But you expect more blue sky.
Lord de Mauley
Yes, I do.
Graham Stringer
Whose idea was the institute? Where did the impetus come from for it? Was it Government, was it Capita, or was it Newcastle University?
Lord de Mauley
My understanding is that it arose out of the discussions between Capita and Newcastle.
Graham Stringer
So it was not a Government initiative in that sense.
Lord de Mauley
No.
Graham Stringer
Do you think the new institute will take research away from FERA and DEFRA, or will there be enhanced research? Will the totality be greater than the parts?
Lord de Mauley
Certainly the direction of travel, in terms of the relationship, is that it will be done on site. There will be interaction between the scientists and it will have an extremely positive effect.
Graham Stringer
Again, you heard the discussions with the previous panel about the governance arrangements. Do you think that the Government should have a direct appointee on the board that runs the institute rather than it being a secondary relationship?
Lord de Mauley
What was important to us was that we had directors on the board of the joint venture, which, after all, is the bit that is providing the services to us. The institute is the bit that will be doing the basic research, as I said. It will belong to the joint venture. We felt that was the appropriate structure.
Graham Stringer
Organisations, when they have their own boards, can sometimes do very good things and poor things, but you don’t think that the Government should have a direct representative there. If you follow the public money through, there is public money in there, isn’t there? Do you not think that there should be a Government representative on that board?
Lord de Mauley
As I say, what is really important to me is that we have representation on the board of the joint venture, which is providing the services directly to us—the emergency response, the plant health and so on. The joint venture will control the joint research institute. We felt that that was an adequate, proper and appropriate level of oversight.
Stephen Mosley
Currently, FERA has an external science panel and it also makes use of DEFRA’s chief scientific adviser to provide both independent challenge and advice on the scientific activities of FERA. Where will this independent challenge come from under the new structures?
Lord de Mauley
The chief scientific adviser will be on the board, and he will provide that oversight.
Stephen Mosley
Currently, there is an external science panel and it is made up of quite a wide range of people. Will that still be in place under the new structure?
Lord de Mauley
Yes, it will.
Stephen Mosley
Within the contract, what sort of performance indicators are there that specify the terms of the scientific research and development that occurs?
Lord de Mauley
Can I add that to my letter? It is a point of some detail and I think it is important.
Stephen Mosley
Okay.
Graham Stringer
It will be a very long letter.
Stephen Mosley
How will that be measured and who will have the role of overseeing it? Will it be an internal figure or would it be DEFRA?
Lord de Mauley
It will certainly be DEFRA. It is quite a complicated range of performance indicators. Rather than me telling you at length, it is important that I set it out in writing.
Stephen Mosley
Thank you; that will be appreciated. Moving one step away from the specifics of those indicators, who will be measuring them and what will happen if they fail to meet those indicators?
Lord de Mauley
I am sorry, Mr Mosley, but I don’t think you were here when I went through how, if there are problems, they are escalated. Initially, it is handled at the level of the recipient of the service. If things go wrong, it is escalated. There are several levels of escalation, which mean that ultimately, if everything goes badly wrong, the service can either be pulled back into the Department in the case of plant health, or they lose the business.
Stephen Mosley
In 2014, the Public Accounts Committee recommended that the National Audit Office should have access to the information associated with public sector contracts to facilitate parliamentary scrutiny of private sector provision. Has DEFRA followed those recommendations?
Lord de Mauley
Yes. Of course they are involved in the process. They will see the final contract.
Chair
Lord de Mauley, there is quite a lot to follow up from this. The number of sitting days we have left are very few in this Parliament, and it would be helpful if you could ask your officials to scribble away as soon as possible and get information to us on the outstanding points, because we need to reflect on this within a week or so. Thank you very much for your attendance this morning.
Lord de Mauley
Thank you, Chair. We will start today. Oral evidence: Future of the Food and Environment Research Agency, HC 1070 7