Better Defence Acquisition

GCHQ – in the House of Commons at 5:04 pm on 10th June 2013.

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Photo of Philip Hammond Philip Hammond The Secretary of State for Defence 5:04 pm, 10th June 2013

The defence of UK national interests is a priority for this Government. To secure that defence, we must provide our armed forces with the equipment and capabilities they need to operate in a rapidly changing security environment. Without the right equipment, delivered on time, properly maintained and available for use, our armed forces cannot function effectively and our national interests are put at risk. Effective procurement and support of defence equipment is therefore not just desirable, but an essential part of maintaining flexible and effective armed forces.

For decades, there has been an acknowledgement that defence acquisition in this country can, and should, be done better. Despite numerous reviews and reorganisations, successive Governments have failed to embed the systemic changes necessary to achieve that objective. We owe it to the men and women of our armed forces, and to the long-suffering taxpayer, to do better.

Two separate independent studies carried out for the Ministry of Defence have suggested that the costs arising from inefficiency in the procurement process are between £1.3 billion and £2.2 billion per annum. Waste on that scale is unacceptable at any time; more so at a time of acute pressure on the public finances. I am determined to drive a step change in the way we do our defence procurement business.

In April, I announced to the House that we had launched the assessment phase for the Department's matériel strategy programme, considering two options for the future of the Defence Equipment and Support organisation: the first, a public sector benchmark, which we call “DE&S+”; and the second a Government-owned, contractor-operated entity, a “GoCo”.

Today, I am publishing a White Paper that sets out the matériel strategy proposals in more detail, and provides more information about our intention to create a new statutory framework to drive better value in single-source procurement contracts, protecting the taxpayer in this significant area of MOD business. We believe that a GoCo-operating model is the solution that is most likely effectively to embed and sustain the significant change that is required to reform defence acquisition, but the decision will be based on an objective value-for-money comparison between the GoCo and DE&S+ options. The assessment phase is designed to deliver specific, costed, contract-quality proposals from GoCo bidders and test them against the DE&S+ benchmark.

There has been considerable speculation in the media and elsewhere about the scope of a GoCo. At the most extreme, I have seen it suggested that the proposal is simply to hand over £15 billion a year of taxpayers' money to a private company and leave it to decide what kit to buy for our armed forces. Let me reassure the House that that is emphatically not the proposition. If GoCo is the selected option, the GoCo partner will manage DE&S on behalf of the Secretary of State. It will act as his agent. All contracts will continue to be entered into in the name of the Secretary of State. Strategic direction will be provided by a governance function that will remain within the MOD. The GoCo’s customers will be the front-line commands and the

MOD itself. The DE&S work force will be transferred to the GoCo-operating company under standard TUPE arrangements and we will expect the GoCo partner to inject a small number of senior managers, and possibly some key technical staff.

Crucially, the GoCo is assumed to be able to recruit and reward its staff at market rates—a critical freedom in a business that is required to deal with the private commercial sector on a daily basis. The proposal set out in the White Paper is for a phased transfer of DE&S to a GoCo, with checks and break points to allow us to halt the process if it is not delivering the results we require. The legislation and the contract will include a transfer regime that will allow the Secretary of State to transfer the business to another contractor, or back to the MOD, in extremis. If, at the end of the assessment phase, a GoCo operating model is selected, we will need to be able to move quickly to conclude a contract with the successful bidder. The Government therefore intend to provide in the Defence Reform Bill the necessary authorities to let a GoCo contract in 2014, together with measures required to allow a GoCo to operate effectively.

There are finely balanced arguments about whether primary legislation is strictly required to allow the establishment of a GoCo. The Government have, however, decided that it is right that we should legislate in this instance because of the importance of DE&S+ to our armed forces and in order to ensure that Members of both Houses, many of whom take a keen interest in defence matters, have a proper opportunity to explore and debate the issues.

The White Paper sets out the proposed model for a GoCo, its key features and our expectations with regard to the control that the Department will continue to exercise and the freedoms that the GoCo will enjoy. Its purpose is to set in context the legislation that we are bringing forward in the Defence Reform Bill, including provisions to ensure that the Ministry of Defence police have the appropriate jurisdiction to be able to operate within the GoCo environment, to extend certain statutory immunities and exemptions enjoyed by the Crown—for example, in relation to the Health and Safety at Work etc. Act 1974 and the Nuclear Installations Act 1965—to the new body, and to allow the transfer of shares in the operating company and/or property, rights and liabilities in the operating company or contracting entity at the direction of the Secretary of State.

The White Paper also sets out reforms to how the MOD undertakes single-source procurement of defence equipment. Open competition is our preferred approach to getting value for money, but sometimes there is only a single provider of a capability we require, and the need to maintain critical national industrial capabilities or sovereign control of the intellectual property in equipment programmes sometimes requires us to place contracts with UK companies without a competitive process.

Single-source procurement accounts for about 45% of the total the MOD spends on defence equipment and support, or about £6 billion per year, and is likely to remain at those levels for the next decade or so. Without competition, suppliers can price and perform without being constrained by the disciplines of the marketplace.

There is a clear risk to defence and the taxpayer, and ensuring that we get good value for money in single-source procurement is a key part of my programme to reform defence acquisition.

The MOD currently uses a framework for single-source procurement which has remained largely unchanged for the last 45 years, despite the far-reaching changes to the industrial landscape and to commercial procurement practices that have occurred in that time. Under this system, the profit contractors can earn is fixed, but there are few incentives for them to reduce costs. Such a system does not serve the best interests either of defence or of a competitive, export-focused defence industry.

In 2011, the MOD commissioned Lord Currie of Marylebone to undertake an independent review of our existing approach and to make recommendations. He recommended a new framework: one that is based on transparency of contractor cost data, with much stronger supplier efficiency incentives, underpinned by stronger governance arrangements. Based on his recommendations and extensive consultations with our major single-source suppliers, we have developed the new framework I am proposing, details of which are set out in the White Paper. At its heart is the principle that industry gets a fair profit in exchange for providing the MOD with the transparency and protections we need to assure value for money.

A statutory basis will ensure widespread coverage across our single-source suppliers and application of the regime throughout the single-source supply chain. The system will be policed by a stronger, independent, single source regulations office to monitor adherence and to ensure the regime is kept up to date. These changes will incentivise efficiency in operating costs and minimisation of overheads, supporting UK defence sector competitiveness both at home and in export markets.

The proposals set out in this White Paper will deliver the real reform our acquisition system needs to provide the support our front-line forces deserve, to maximise the benefit of our £160 billion 10-year defence equipment programme, and to deliver value for money for the taxpayer. I commend this statement to the House.

Photo of Jim Murphy Jim Murphy Shadow Secretary of State for Defence 5:14 pm, 10th June 2013

I start by thanking the Secretary of State for his statement and for advance sight of it. Reform of defence procurement is one of the major challenges facing UK defence. Those on both sides of the House will want to see reforms that deal with overspends and overruns, and ensure that world-class equipment is delivered when and where our forces need it. For too long, the good intentions of successive Administrations have not delivered sufficient reform in defence procurement. However, just as some of the responsibility can be shared, our resolve to learn the right lessons and deliver far-reaching reform must also be collective. We therefore welcome much of today’s statement.

Future procurement systems must provide value for money within financial constraints. Better performance will come from greater professional project management, faster decision making, fuller accountability for outcomes and a more considered use of military expertise. Labour supports reforms—the Bernard Gray report, on which today’s White Paper is based, was commissioned by the previous Government. We have proposed a new budgetary discipline, whereby deferred decisions that increase cost are accounted for within a rolling 10-year cycle, and increased certainty for industry over sovereign and off-the-shelf capabilities.

Labour Members are open-minded about how that is achieved, but I wish to be clear that welcoming this process today is not the same thing as supporting a GoCo in principle. There needs to be rigorous examination of all the possible options and a robust comparison between the two options of a GoCo model and DE&S+. That comparison should rest on the principles of ensuring value for money within programmes; industry adhering to new targets on time and cost; maintaining parliamentary accountability; enhancing a culture of consequence for decision makers; and military involvement being based on tri-service working, not on single-service rivalry. So reform must extend across the Ministry of Defence. Too often, scope creep has led to systems exceeding identified need, and major decisions have been pushed to the right to save in the short term at the expense of longer-term budgetary bow wave. Today’s challenge for Ministers is not just to determine a management model, but to demonstrate that decades-long entrenched behaviours are being corrected.

Let me deal with the specifics of today’s announcement. On the assessment phase, will the Secretary of State pledge to publish the findings of the two value-for-money studies and allow for a consideration by this House prior to a final decision being taken in the legislation? It is essential that Parliament, industry and our armed forces have full confidence that strategic affordability is the determining factor in this process. On costs, will the Secretary of State say whether the new management team of either model would re-cost the baseline of the core equipment programme, or would the figures published earlier this year remain? Furthermore, in light of the National Audit Office’s observation that the MOD’s assessment of risk is “not statistically viable”, would the new management be able to reform the current method of risk assessment? On staffing, the MOD has said that current reductions will not affect outputs. Would either management model be able to make decisions over staffing independently from the Secretary of State? Will he confirm that trade unions will be consulted throughout the assessment phase?

It is essential to maximise military expertise, so will the Secretary of State say whether he considers it preferable to change the current ratio of military to civilian numbers in procurement within the MOD? Specifically on the GoCo, will he pledge that senior officials currently working on this process within the MOD will not be able to work for the GoCo consortium without a prolonged period of purdah? Many in the country will have a concern about the extent of a private entity’s potential reach over public policy. So, under these plans would a GoCo model cover the whole equipment programme, including the nuclear deterrent? What is the time scale for the implementation of a GoCo? That will enable us to judge when efficiencies may begin to accrue.

One of the biggest uncertainties around GoCo has to do with the ownership of risk and whether contractors could generate private profit while financial risk remained in public hands. For example, can the Secretary of State say whether liability for the £468 million cost overrun noted in the National Audit Office’s “Major Projects Report 2012” would have rested with the taxpayer or the GoCo, had it been established?

On the single source regulations office, we welcome the proposal in principle and will examine it closely. It is essential to drive down cost where possible in single sourcing, as the Secretary of State said. Will he say a little more about who would appoint the members, and whether regulations would be subject to the one-in, one-out rule?

In conclusion, we will support what we hope is a genuine competition. We will scrutinise the processes carefully, because efficient and effective defence procurement is essential, not just for the Ministry of Defence bottom line, but for the remarkable men and women of our armed forces, whom we place in harm’s way to serve on the front line.

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I am grateful to the right hon. Gentleman for his welcome of this announcement. Of course I completely accept that the Opposition’s willingness to look at the issues with an open mind is not the same as an uncritical endorsement of the GoCo concept, and just in case I did not make this clear in my opening remarks, we have not yet accepted the GoCo concept as the chosen outcome; we are conducting an assessment. However, I think we agree across the House—Opposition Members who have, in office, experienced the challenge of trying to make the defence budget add up will certainly agree—on the need for change. The intentions are very clear.

The process that we are talking about was kicked off by the Gray report, published in 2009. I note that the then Secretary of State has strongly endorsed the GoCo model, which he feels is the way forward. We are examining the case for GoCo against the baseline of DE&S+. We have two separate teams, working with Chinese walls between them, that are equally resourced. One is trying to build the maximum fully-public-sector case that it can, taking advantage of all freedoms and flexibilities available. The other is working with potential GoCo bidders to look at the value that they can deliver. At the end of the process, we will make a comparison.

The right hon. Gentleman talked about the cost drivers from past scope creep. One of the clear advantages of changing the way that DE&S works is creating a harder boundary between the customer and the company supplying the requirements, making it less easy for scope to creep without a proper change process and proper recognition of the costs involved. He asked me whether the baseline would be re-costed. We do not anticipate a re-costing of the programme baseline. If we go down the GoCo route, we will negotiate with GoCo bidders for an incentivised fee structure, based on the existing costed programme. He will know that an independent cost advisory service sits alongside DE&S, and will play a continuing role in independently assessing the costs of projects and the appropriate level of risk to be attached to them.

Unsurprisingly, the right hon. Gentleman asked me about staffing levels in a post-GoCo DE&S, if GoCo is the selected solution. The staffing transfer would be made under the TUPE regulations. We anticipate about 8,000 of DE&S’s projected 14,500 2015 staff numbers transferring to the new entity, with the remainder—in naval dockyards, logistics, communications, and information services—remaining in other parts of Government, or being outsourced.

There is no reason to suppose that the GoCo route is more likely to deliver further staffing reductions than any other route. Clearly, the new management team, whether it is a GoCo or DE&S+, will seek to run the business efficiently, and to use the freedoms and flexibilities available to it to deliver outputs as effectively as possible.

The right hon. Gentleman asked me about the ratio of military to civilian personnel in DE&S. At present about 25% of the personnel in DE&S are military. We expect the military role, which will be performed by secondees in the future, to focus on providing specifically military advice to the DE&S organisation, rather than filling line management and project management roles, so I do not expect the military proportion of staff to increase, and it may decrease under a future model.

The right hon. Gentleman asked me a question, the motivation for which I entirely understand, about senior officials. Nobody wants to see such exercises becoming a gilded exit route for senior officials, and I am pleased to be able to tell him that the Chief of Defence Matériel, the most senior official in DE&S, will transfer to the MOD side—the customer side—of the equation and will be responsible for designing and managing the customer side. I cannot, as the right hon. Gentleman knows, give him an absolute assurance that other officials in the Department, should they choose to leave the Department, would not at some point in the future be able to join a GoCo, but of course there are rules and restrictions in place—a Cabinet Office regime which has been reinforced following revelations in The Sunday Times last year—and we will make sure that nobody is able to abuse this process.

The right hon. Gentleman asked me whether the GoCo would cover the nuclear deterrent. It will certainly cover the procurement of Vanguard replacement submarines. The management of our nuclear warheads is carried out by the Atomic Weapons Establishment, itself already a GoCo. We have not yet finally decided whether the new GoCo, if there is one, will be responsible for managing the MOD’s relationship with AWE or whether that will be managed directly. That will be one of the issues dealt with in negotiation with potential GoCo bidders.

On timescale, I can tell the right hon. Gentleman that we expect to reach a decision in the summer of next year, with a view to the new arrangements, whether GoCo or DE&S, being stood up before the end of 2014.

Finally, I turn to the question of risk ownership. This is an important point which has been somewhat misunderstood by some commentators. Clearly, it would be very attractive to think that we could transfer the programme risk in the defence equipment programme—£160 billion of it—to somebody in the private sector, but the reality is that there is nobody who has a balance sheet big enough, probably anywhere in the world, and the taxpayer would not be prepared to accept the price for taking on that risk, so the risk ownership in the programme will remain with the Government and the taxpayer. What the private sector partner will be at risk for is his fee, which will be structured in such a way as to incentivise the delivery of the key performance indicators that will be agreed with the partner during the negotiation process. That will be designed to align the GoCo partner’s incentives with the interests and priorities of the Department. That is where a great deal of our time and energy is being invested at present.

Photo of James Arbuthnot James Arbuthnot Chair, Defence Committee

What discussions has my right hon. Friend had with key allies, notably the United States and France, about this proposal and what has been their response?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I thank my right hon. Friend for a very important question. We have had discussions with key allies, notably the United States and France. The United States, contrary to some media reporting, is relaxed about this process. It recognises that there will be some technical issues that we need to resolve, but I am glad to be able to tell him that the Chief of Defence Matériel received this morning, by coincidence, a letter from his counterpart, the Under-Secretary for defence procurement, in the Pentagon confirming that the United States is confident that it will be possible to make these arrangements work. We have set up a joint working group to work through the issues that will need to be addressed before a decision is made.

Photo of Madeleine Moon Madeleine Moon Labour, Bridgend

What powers will Defence Ministers and Select Committees have to intervene and examine contracts, negotiations and procurements if the GoCo goes ahead? What powers of oversight will Parliament retain?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

As I said earlier, the procurement contracts will still be entered into in the name of the Secretary of State. The Secretary of State and Ministers will remain accountable to Parliament and to the Select Committee. The permanent secretary at the Ministry of Defence will remain accountable to the Public Accounts Committee, and access to and scrutiny and oversight of those contracts will be exactly the same as they are now.

Photo of Bob Stewart Bob Stewart Conservative, Beckenham

Will the proposed GoCo have the power to negotiate independently of the Ministry of Defence to try to get a really good deal out of a foreign defence contractor in, for example, in the United States?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

If doing so was within the remit given it by the Secretary of State, it would have that power. I need to be very clear about this. The point of hiring a commercial partner is to deploy its commercial expertise. There is no point hiring it and then constraining it so tightly that we do not get any benefit from it. On the other hand, it will be very clear, and I am very clear, that it will always operate within the framework of strategic direction that has been given by the Secretary of State, and the Secretary of State will retain a power to intervene and specifically direct it on a specific point within its management of a programme if necessary.

Photo of Angus Robertson Angus Robertson Shadow SNP Spokesperson (Defence), Shadow SNP Spokesperson (Foreign and Commonwealth Office), Shadow SNP Westminster Group Leader

I thank the Secretary of State for advance sight of his statement. Will he clarify that should one go down the GoCo route he has no objection in principle to the winner of a GoCo contract, should that be the preferred outcome, being headquartered in the United States, Europe or further afield?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

The hon. Gentleman and the House might be interested to know that of the 21 expressions of interest that we have received in response to the issue of the pre-qualification questionnaire, a third have been UK- headquartered companies, but it is likely that the winner of a competition for a GoCo will be a consortium and it is highly likely that some members of that consortium will be non-UK companies. In fact, to be frank, it is highly likely that it will include US-headquartered companies, but the entity with which we contract will be UK-registered and domiciled, and will pay its tax in the UK.

Photo of Penny Mordaunt Penny Mordaunt Conservative, Portsmouth North

I congratulate the ministerial team on its progress on this important matter. DE&S covers Her Majesty’s Navy bases. Will the Secretary of State reassure me that his announcement today will not affect the proposal to transfer them to the Royal Navy?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I can assure my hon. Friend that the plan to transfer the Royal Navy dockyards out of DE&S, along with the plan to transfer the logistics and commodities supply service out of DE&S to an outsource contractor, will continue on track. That is why there is a gap between the projected 2015 total numbers of DE&S on a steady state basis, and the 8,000 that we are expecting to transfer under a TUPE transfer if we go down this route.

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation, NATO Parliamentary Assembly (President)

How much does the Secretary of State think that the new arrangement will save each year? Will those savings be used to buy additional equipment for our armed forces, or simply returned to the Treasury, leaving our servicemen with less?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

The latter part of the hon. Gentleman’s question is clearly one that I cannot answer on a unilateral basis, but I suspect that, in the way that generally happens, there is a potential win-win situation here—a win for the taxpayer in terms of lower public expenditure and a win for the armed forces in terms of greater capabilities being able to be purchased. I think I included these figures in my statement, but the independent estimates are that somewhere between £1.3 billion and £2.2 billion of frictional costs generated by inefficiencies in the procurement system are incurred every year. It would be a very rash man who suggested that we can squeeze out every last pound of those, but I would expect us to be able to achieve net gains after taking account of the cost of the arrangements—the GoCo fee and the cost of the governance function on the MOD side—in the hundreds of millions of pounds.

Photo of Julian Brazier Julian Brazier Conservative, Canterbury

I welcome my right hon. Friend’s thoughtful statement. Will he confirm not only that Aldermaston is a GoCo, but that in fact most of the American nuclear programme has historically been run by university-led GoCos? I urge him to look carefully at the issue of military project managers and at the experience from abroad. In land systems, in particular, we can end up with a project manager and an expensive military adviser, rather than one uniformed officer driving it forward. It is worth looking at the Swedish experience, for example, which is of a very effective and tight ship with mostly military project managers.

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I hear my hon. Friend’s point but, to be blunt, I think that we have to be realistic about this and acknowledge that military personnel are not necessarily trained to be best equipped to deal with world-class industrial project managers employed on eye-wateringly large salaries by the defence contractors we have to negotiate with. It is to try to allow DE&S to engage with those multinational corporations and world-class project managers on a level playing field that we are considering these changes. There will be a role for the military in this organisation, but it will not generally be as lead project mangers.

On my hon. Friend’s other point, I am grateful to him for drawing the House’s attention to the fact that the majority of the US nuclear programme is in the hands of non-public sector organisations—federally funded research and development corporations—which look very much like GoCos.

Photo of John Woodcock John Woodcock Labour, Barrow and Furness

The strategic defence and security review in October 2010 resulted in a four-year delay to the in-service date for the Vanguard class replacement submarines. It was by no means the first project that has been shifted to the right with increased costs, but it caused particular disappointment because it was done by an Administration who, when in opposition, criticised the former Administration for doing similar things. If a GoCo is in place when such decisions are considered in future, on submarines or anything else, will it be taken out of Ministers’ hands?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

As I have already said, Ministers will retain the ability to provide strategic direction. If the hon. Gentleman does not mind, I will take no lectures from the Opposition on shifting projects to the right at huge cost, because the previous Government shifted the carrier project two years to the right at a cost of £1.6 billion. What was actually done in 2010, in relation to the submarine enterprise, was a reconfiguration of the programme between the Astute class submarines and work on the Vanguard class replacement submarines, which resulted in a delay to the introduction into service of the Vanguard class, but within the overall constraint that we have in this country of needing to sustain a submarine yard at Barrow, and the minimum level at which we can sustain a submarine yard is building one submarine at a time. However we configure them—Vanguard class first or Astute class first—we have to provide that work flow if we are to keep that sovereign capability. That is the kind of single-source procurement that we are targeting in the announcement I made today on the single-source procurement rules.

Photo of Martin Horwood Martin Horwood Liberal Democrat, Cheltenham

I commend the Secretary of State for getting to grips with defence procurement, which is long overdue, but does he recognise that there is nervousness in some quarters about the complexity of the emerging process, which will involve the MOD, the armed forces, NATO, the private supplier, the GoCo and the independent cost advisory service? Can he give the House any reassurance that new inefficiencies will not creep into the system as a result of that complexity?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I will be very frank with the hon. Gentleman: one of the things I have learnt over the past three years is that new inefficiencies creep in all the time if one is not continually vigilant. That, incidentally, is why, however much one thinks one has squeezed out all the inefficiencies, when one goes back around the loop and looks again one finds more that were not noticed the last time or that have crept in since. He is absolutely right to say that it is a complex enterprise, but within the overall portfolio of defence transformation—we are carrying out many hugely complex projects simultaneously —it is just one of many, and I am confident that we can manage it.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

Will the Secretary of State assure the House that the interests of national security and the safety of our armed forces, to whom we owe a great debt of gratitude, as well as value for taxpayers’ money, will be at the heart of the changes in defence procurement? Will he also assure us that all essential defence equipment will be made available to our front-line forces in the defence of the nation?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I can of course give the hon. Gentleman that assurance. We are trying to do two things: to ensure that the £160 billion defence equipment and support programme is delivered effectively to our armed forces and that it is delivered efficiently and in a value-for-money way to the taxpayer. In the end, this allows us better, more reliably and more sustainably to support our armed forces while ensuring that this is done in an appropriate way during a period of public financial austerity.

Photo of Gerald Howarth Gerald Howarth Conservative, Aldershot

I was a fan of Mr Bernard Gray’s report in 2009 when I was shadow defence procurement Minister, but I was a bit nervous about his proposals for a GoCo, so I welcome my right hon. Friend’s caution; he has taken the right attitude. Will he set out the mechanism by which he hopes to be able to maintain the crucial industrial capabilities that this nation needs, because that is an extremely important part of his statement? Will he also set out how the new proposals might avoid the mistakes of the £800 million cost overrun on the disastrous Nimrod programme?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I am grateful to my hon. Friend. He knows me and he knows that I am a cautious person. This is a big and complicated project, and we are approaching it carefully. We are weighing up the options and taking the appropriate length of time to make the decisions, and I am confident that they will deliver the result that we require. He asks about our national sovereign capabilities. We have set out our approach to the defence industry in the White Paper “National Security Through Technology”. We have also set out today, in this White Paper, the proposed changes to single-source pricing regulation and how we expect to drive greater efficiency into the single-source part of the defence industry that delivers about half our requirements. Only by making those in that sector focus on reducing costs, which they currently have very little incentive to do, will we make them not only efficient providers to us but efficient and competitive players in the international defence export market. That is in the interests of the industry, the UK’s armed forces and UK plc.

Photo of Tom Greatrex Tom Greatrex Shadow Minister (Energy)

The Secretary of State referred to the freedom to recruit and reward staff with market rates as, I think, a “critical” freedom in the potential move to a GoCo. In that phased transfer, would any increased remuneration in bonus packages still come from the MOD baseline?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

That depends. We would expect a GoCo contractor to inject a certain number of senior staff who would be part of its package and who would be remunerated through its incentivised fee. Within the overall DE&S work force, getting the right skills in the right places will be part of the task for the management contractor. In some cases, that will mean recruiting at market rates, because at the moment we are haemorrhaging talent. The Under-Secretary of State for Defence, my hon. Friend Mr Dunne, has just given me an example where we had nine applicants for 70 commercial posts that have recently been advertised. We have to address the haemorrhage of talent from DE&S by offering market rates if we are to support our armed forces as we need to.

Photo of Peter Luff Peter Luff Conservative, Mid Worcestershire

The Secretary of State will understand how pleased I am that he has announced the implementation of the major elements of the report that I commissioned from Lord Currie on single-source pricing regulations—a highly technical but really important subject. On DE&S, does he share my concern that there may be forces even in his own Department, and certainly elsewhere in Government, that may wish to frustrate the progress towards a GoCo? May I encourage him to reassure me that he will work enthusiastically and energetically, notwithstanding his caution, to overcome unreasonable, opportunistic or bureaucratic obstacles put in his way on the path to a GoCo?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I am grateful to my hon. Friend and happy to acknowledge the crucial part that he has played in the process that has led us to this announcement. I can safely say that yes, there will always be forces that resist any change that I look to make. We have to carry the case by making the argument, building it during the assessment phase and then presenting the value-for money case for the Go-Co against the DE&S+ benchmark comparator. I am absolutely clear that we have to make that case: there is no pre-judgment that a GoCo is the route we will follow. We have to prove that it provides value for money, and do so to some of the institutionally most sceptical forces—no names, no pack drill—in Government.

Photo of Paul Flynn Paul Flynn Labour, Newport West

Has the Secretary of State noticed the extraordinarily high number of former Ministers, civil servants, admirals and generals who awarded contracts to companies when in office and then ended up working for the self same companies in retirement? Would not it be a good idea to ban these senior people from working in companies to which they have awarded contracts, in order to ensure that contracts are awarded in office on the basis of the needs of the public purse and not on people’s hopes to gain a hacienda in Spain from their retirement earnings?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

The hon. Gentleman is being a little harsh: most if not all of the elected and appointed people with whom I have come into contact do their very best to deliver in the public interest. We have a rigorous set of rules in place to deal with the cross-boundary issues between the public and private sectors. We must never get into a situation where we prevent or discourage all transfer between the public and private sectors. That would be a disaster. We need that flow of lifeblood between the two, but we need it to be done properly: it has to be properly regulated and transparent.

To answer the hon. Gentleman’s specific question, when The Sunday Times published revelations last year about people who had gone from senior military roles into defence industries, I asked the same question as he has and the advice I received was that it would not be lawful to issue an unlimited ban preventing people from taking up one career once they had left another.

Photo of Douglas Carswell Douglas Carswell Conservative, Clacton

For decades, much of the defence budget has been spent in the interests of defence contractors: by constraining the range of suppliers, the seller gets to set the terms of trade. How will these reforms ensure more choice and competition in defence procurement?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I am sorry to say that where there is a single supplier or a national security reason for our having to procure in the UK, we cannot magic up a competitive marketplace. What we can do in such circumstances is control the pricing of those contracts. At the moment, under the current regime, profit is clearly controlled but costs are not, and there is no incentive for contractors to control and manage their costs. What we are proposing is a regime where, as now, profit is controlled but where there are clear financial incentives for contractors to control their costs and get them down. By working in this way—by aligning the interests of defence with those of the contractors—we will drive out cost and increase the amount of deliverable military capability to our armed forces.

Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

What implications will this announcement have on complex weapons systems and in particular on establishments such as Defence Munitions Beith in my own constituency, which houses and services such weapons systems?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

In terms of our procurement of weapons systems and of contractor support for weapons systems, the DE&S will work as the agent of the Secretary of State. I am not sure that I can put my finger on the precise function of the establishment mentioned by the hon. Lady, but we have a separate programme to outsource some of the defence logistics and commodity procurement activities, which I mentioned earlier. None of theses plans will be changed by whether DE&S is run in future as a GoCo or as a fully public sector DE&S+ model.

Photo of Mark Menzies Mark Menzies Conservative, Fylde

Several thousands of my constituents are employed at BAE Systems in Warton, which is involved in advanced manufacturing of military aircraft. What benefits are they likely to see as a result of today’s announcement?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

They will see benefits at two levels and a healthier BAES as a result of this announcement. First, large defence contractors, perhaps counter-intuitively, do not relish the lack of a capable interlocutor in their trading partners. They would welcome our beefing up our capability and having higher-skilled, better-paid project managers on our side of the table, because that would drive genuine efficiencies into the process. At that level, we know that the companies will welcome this announcement. Secondly, on single-source procurement, I am confident that over time by incentivising cost-efficiency we will increase the exportability of British defence products, which are an incredibly important part of our high-tech manufacturing industries and help us to sustain jobs at the very top of the curve.

Photo of John Baron John Baron Conservative, Basildon and Billericay

These are early days and final decisions are yet to be made, but what indication can the Secretary of State give about the impact of this announcement on jobs at MOD Abbey Wood? Will he ensure that suitable provisions are in place for the employees who may be affected?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

As my hon. Friend knows, the TUPE transfer of an enterprise does not imply any reduction in job numbers at the outset. It is true that a private sector partner taking on a work force of this nature will, over time, look to reconfigure the shape of the work force to make the business as efficient as possible. However, it will have to do that within the constraints of the TUPE regulations, normal employment law and the arrangements that are in place for negotiation with the trade unions.

Photo of Bernard Jenkin Bernard Jenkin Chair, Public Administration Committee

I thank my right hon. Friend for his statement and for the White Paper, which will be of great interest to the Public Administration Committee because it is conducting an inquiry into procurement across Government, including defence procurement. I remain to be convinced that a GoCo is the right idea. If, as he says, the objective is to be able to recruit and reward staff at market rates, why can we not legislate to do that in the Ministry of Defence, instead of contracting it out? After all, is not the acquisition of defence matériel and equipment a core function of the Ministry of Defence? We must have those skills in-house, because we cannot expect to manage them in some arm’s length contractor.

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

My hon. Friend says that he remains to be convinced; I am glad to confirm that I remain to be convinced. It is exactly the point of the assessment phase to convince us collectively that this is the right way to go. This proposal is about being able to employ staff at market rates, but that is only a small part of the total challenge. There are many other cultural and behavioural changes that need to be delivered to make it work. He is right that defence procurement is a core function. That is why we will maintain a competent customer function in the MOD, led by the Chief of Defence Matériel and supported by an external private sector consultant to build the intelligent customer function, to ensure that we are in a robust position to manage the GoCo contractor, if that is the route that we choose, not just now but through future evolutions of the GoCo and future appointments of GoCo contractors.

Photo of Jeremy Lefroy Jeremy Lefroy Conservative, Stafford

I thank my right hon. Friend for his statement and for the grip that he has on his Department’s budget. Clearly, the first priority of defence procurement is value for money for the taxpayer, but does the procurement system also take into account the export potential of UK-based companies when making its assessments?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

I am grateful to my hon. Friend. Export potential is an important consideration and one of the Department’s stated priorities. As I have said, I believe that what we are doing, particularly with regard to the single-source procurement regulations, will drive export competitiveness into defence contractors. If a GoCo is appointed, one of its required tasks will be the support of UK defence exports, which is a UKTI lead.

Photo of Jason McCartney Jason McCartney Conservative, Colne Valley

What implications, if any, will these long overdue reforms have for small and medium-sized enterprises in my constituency that are already employed in the defence procurement supply chain?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

We have an active policy of encouraging the engagement of SMEs in the defence supply chain and it includes many thousands of SMEs. The single-source pricing regulations will apply throughout the supply chain, but will have a price threshold. We expect almost all SMEs not to be directly affected because their level of transactions with the MOD will fall below the price threshold. The threshold is yet to be determined, but it is likely to be about £5 million.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I thank the excellent Secretary of State for coming to the House and making this statement. One problem that I have seen with defence procurement is not the way in which equipment has been procured, but the decision by the Ministry of Defence at the beginning of the process to have something more than the standard package. There was the nonsense with the Chinook aircraft, which were bought but never flew because the Department wanted to add to them. Will there be more emphasis on buying standard packages?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

That depends on what we are buying. Clearly, there are things that we can buy off the shelf or from competitive international providers. We recently ordered the new fleet of MARS—military afloat reach and sustainability—refuelling tankers from a South Korean shipyard. That decision did not go down well with everybody, but it was sensible procurement. At the same time, we have to maintain important capabilities that are essential to our national sovereignty here in the UK. In those cases, we have to support the indigenous industry. One purpose of the changes is to make transparent the costs that are driven into a project by the specification of bespoke requirements and to force the customers to recognise those costs.

Photo of James Morris James Morris Conservative, Halesowen and Rowley Regis

I welcome the statement, but will the Secretary of State say more about the timescale over which he expects the reforms to deliver tangible savings to the taxpayer?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

As I said to the shadow Secretary of State, if we went down this route, we would expect to award a contract next year and for it to be effective by the last quarter of 2014. We would then expect there to be a two-stage process towards the full GoCo-isation—if I may use that term—of DE&S. We would expect savings and efficiencies to be generated from the very beginning, and from the second year of operation we would expect there to be cashable benefits.

Photo of Philip Hollobone Philip Hollobone Conservative, Kettering

I congratulate my right hon. Friend on his statement. Were he to save the full £1.3 billion to £2.2 billion of waste that he has identified, he would be able to buy an extra one or two Type 45 destroyers a year and to start to rebuild the Royal Navy back to its proper size. Will he confirm that this is the biggest waste black hole in the MOD budget and that no other hole in the budget has a bigger annual cost?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

It is certainly our assessment that the frictional costs of inefficiencies within defence procurement are the biggest single challenge that we face and our biggest single opportunity. I was at Portsmouth the week before last and talked to the commander of the dockyard. He told me that once the Queen Elizabeth carriers are berthed there, he will be making provision for some 200,000 tonnes of fighting ships to be tied up in the harbour. That will be largest tonnage that he or his predecessors have had to make provision for since the 1960s.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I understood from my right hon. Friend’s thoughtful statement that the organisational merits underpinning the GoCo would be cultural change and skills enhancements to deliver efficiencies. Will he tell the House in more detail what missing skills he hopes to attract? Will he also reassure us by saying what steps he will take in the incentives scheme for the management company of the GoCo to avoid the perverse incentives that led to so many financial messes in public-private contracting under the last Government?

Photo of Philip Hammond Philip Hammond The Secretary of State for Defence

My hon. Friend is right in setting out the changes that are required. One he did not mention, but which is important, is creating a hard boundary between the customer and the provider organisation. At the moment, responsibilities across that boundary are not as clear cut as they should be, and that allows specification scope to drift on occasions. Let me give him a couple of examples. We currently spend in DE&S £400 million a year on external technical support because we cannot hire the people we need. Being unable to hire somebody at £50,000 a year means that we are paying a contractor £1,000 a day to do the work. We expect the GoCo contractor, if we go down that route, to make substantial early savings by hiring key technical capabilities into the organisation, rather than by bringing them in as technical contractors. He is absolutely right about perverse incentives. Our big challenge now in the assessment phase is to negotiate a set of key performance indicators and incentive payment structures that align a GoCo contractor with the priorities of the Ministry of Defence.