Defence Reform Bill — Second Reading

Part of the debate – in the House of Lords at 3:23 pm on 10th December 2013.

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Photo of Lord Astor of Hever Lord Astor of Hever The Parliamentary Under-Secretary of State for Defence 3:23 pm, 10th December 2013

My Lords, our Armed Forces do an exceptional job and I am sure that all of us in this House will wish to pay tribute to their dedication and the sacrifices they make to keep this country safe. But the Armed Forces can defend the country and protect our national interests only if we provide them with the manpower, equipment and support that they need. In particular, making sure that our Armed Forces have the right equipment, delivered on time and to the right specification, is essential if we are to maintain our capabilities into the future. Making full use of the expertise and skills of our Reserve Forces is also crucial if we are to meet the security challenges that we face over the next decade and beyond.

Let me start this debate by addressing the issue of the reform of the Defence Equipment and Support organisation, which is covered in Part 1 of the Bill. My right honourable friend the Secretary of State for Defence made a Statement earlier today in the other place, and I would like to set out what that said.

The 2010 strategic defence and security review set out the Government’s vision of an agile Armed Forces designed to face the challenges of the 21st century. Central to delivering and sustaining that vision is the ability to procure and support the equipment that the Armed Forces need. There is widespread acceptance that the present defence acquisition process is not good enough. While there have been notable successes, there have also been many examples of poor performance and unsatisfactory outcomes for the Armed Forces and the taxpayer.

The significant reforms that we have already instituted to DE&S are only a start. A more radical reform of DE&S is necessary if it is to sustain the skills that it requires to support our Armed Forces effectively. That is why we developed the matériel strategy programme, which is designed to remove the obstacles to bringing in critical skills by exploring alternative models for DE&S. It was announced in April that the Government had concluded that a Government-owned, contractor-operated model, a GOCO, might well be best placed to deliver the changes required in DE&S, but that we needed, through a competition, to test the market’s appetite for that model and confirm that it would deliver value for money.

In parallel, it was announced that we would work up a public sector comparator, exploring the maximum extent of flexibility that could be achieved within the public sector—a model that we have called “DE&S-plus”. The Government have maintained an open mind as to which option would prove overall to deliver the best balance of risk and potential reward once bids were received.

On 19 November my right honourable friend the Secretary of State informed the other place that we had reached the detailed proposals stage of the competition, with only one bid being received from the two consortia remaining in the process. That bid was from Materiel Acquisition Partners, a Bechtel-led consortium. The Government made clear that we would consider carefully how best to proceed in the light of this development. It has now been confirmed that we have decided not to continue the present competition.

The heart of our approach was to test the market’s appetite for delivering a GOCO along the lines that we had set out, using the competitive process to drive innovation and value. We have always recognised that there are risks inherent in the GOCO approach. With only one bidder remaining in the competition at this intermediate stage, a judgment has had to be made about whether the public sector comparator alone would generate sufficient competitive tension to ensure an effective outcome for the Armed Forces and value for money for the taxpayer. Although the remaining consortia presented us with a credible and detailed bid, we do not have a competitive process. It has therefore been concluded that the risks of proceeding with a single bidder are too high to be acceptable.

We believe that a GOCO remains the best potential future solution to the challenge of transforming DE&S, but that further work is necessary to develop DE&S financial control and management information systems to provide a more robust baseline from which to contract with a risk-taking GOCO partner. We are clear that the only realistic prospect of resolving the delivery challenges facing DE&S in an acceptable timescale is with the injection of a significant element of private sector support. It has therefore been decided to build on the DE&S-plus proposition, transforming DE&S further within the public sector, bringing in that private sector support and ensuring that it becomes “match-fit” as the public sector comparator for a future market-testing of the GOCO proposition.

To do this, we will recognise the unique nature and characteristics of DE&S as a commercially facing organisation by setting it up as a bespoke central government trading entity from April 2014. The new entity will be at arm’s length from the rest of the MoD, with a separate governance and oversight structure—a strong board under an independent chairman, and a chief executive who will be an accounting officer, accountable to Parliament for the performance of the organisation. This will deliver another of the recommendations from the noble Lord, Lord Levene. Crucially, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury, around how it recruits, rewards, retains and manages staff along more commercial lines to reflect its role in managing some of the most complex procurement activity in the world.

These changes will reinforce the relationship between the military command customers and DE&S, leading to a more business-like approach, allowing us to move earlier to a hard-charging regime and thus further addressing one of the weaknesses identified in the 2009 Gray report. They will allow DE&S to procure crucial private sector support through a series of contracts to deliver key changes to systems and processes and to support programme management while organic capabilities are built. They will permit the recruitment into DE&S of key commercial and technical staff at market rates and with minimum bureaucracy. Bernard Gray has agreed to become the first chief executive of the new trading entity, thus providing a vital thread of continuity to the continuing DE&S reform agenda from the original Gray report. Alongside the changes to DE&S, we will also continue with the reform of our wider acquisition system, which is focusing on making us a more intelligent customer—a key role for our military, alongside the important role it will continue to play within the DE&S.

These changes will drive significant incremental improvements in DE&S as well as delivering the mechanisms that will give the organisation a robust performance baseline. That will allow the MoD, at a future date, to retest the market’s appetite for continuing the DE&S evolution into a GOCO and its ability to deliver guaranteed value for money against a match-fit public sector comparator. On both counts, this course of action represents the best way forward for our Armed Forces and for the taxpayer.

Part 2 of the Bill sets out a statutory framework for defence contracts awarded in the absence of a competitive process. The White Paper on defence acquisition published in June this year included important changes to our single-source procurement regime. These changes follow the independent report on single-source procurement that was carried out by the noble Lord, Lord Currie of Marylebone, in 2011. Although competition is our preferred approach, the need to maintain critical national industrial capabilities or sovereign control of the intellectual property in equipment programmes sometimes requires us to place contracts without a competitive process. Single-source procurement typically 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, putting value for money at risk. The absence of an alternative supplier also undermines our contractual negotiations because we have a duty to provide our Armed Forces with the equipment they need, and our suppliers know we cannot go elsewhere. These are serious shortcomings, and we need to address them with an approach to single-source procurement that ensures we get value for money, while still allowing our suppliers a fair and reasonable price, and where the safeguards we need are not regarded as voluntary and a matter for negotiation.

The MoD currently uses a framework for single-source procurement which has remained largely unchanged for the past 45 years. Under this system, which is voluntary, the profit contractors can earn is fixed and there are few incentives for them to reduce costs. The noble Lord, Lord Currie, recommended a new framework: one that is based on transparency, with much stronger supplier efficiency incentives, and which is underpinned by stronger governance arrangements. Based on his recommendations, and following extensive consultations with our major single-source suppliers, we have developed the framework provided for in Part 2.

The Reserve Forces make an essential contribution to delivering the nation’s security at home and overseas. They are an invaluable part of our Armed Forces, working alongside their regular counterparts to deliver military capability. On 3 July this year, we published a White Paper that set out a range of measures for revitalising the Reserve Forces, reversing the decline of the recent past, growing their numbers and investing an additional £1.8 billion over 10 years in their training and support. These measures include improved training and more opportunities for reservists to train overseas, enabling them to undertake the same range of military tasks as regulars, including overseas capacity building and responding to crises at home. The tax-free annual training bounty will be developed to recognise commitment, encourage retention and reward the appropriate level of capability. Reservists will also have improved access to healthcare and better access to welfare support. This will provide reservists with a challenging and rewarding experience. The Bill before us today includes the legislative changes needed to help modernise and make greater use of our reserves and to ensure that both they and their employers are treated fairly.

Part 3 of the Bill makes changes to the Reserve Forces. First, it extends the current powers to call out members of the Reserve Forces. This will allow reservists to be called out for any purpose for which regular forces may be used. Secondly, it allows the Secretary of State, by regulations, to provide for the making of payments to employers to incentivise the recruitment and retention of reservists. Thirdly, it provides improved employment protection for reservists by allowing a right of access, without a qualifying employment period, to the employment tribunal for unfair dismissal where dismissal relates to their reserve service. In addition, the Territorial Army will be renamed the “Army Reserve” and the Army’s ex-regular reserve force will be renamed the “Regular Reserve”.

The support of employers is crucial to delivering the future Reserve Forces and we seek to strengthen the Ministry of Defence’s relationships with employers. The White Paper set out how we will do this by making liability for call-up more predictable, making it easier for employers to claim the financial assistance that is already available and introducing a new employer recognition scheme building on the corporate covenant to ensure that reservist employers receive the recognition that they deserve. We acknowledge that reserve service can have a particular impact on SMEs. We understand these challenges and believe that our measures, particularly those around providing employers with greater predictability, greater transparency and financial support, will be especially important for SMEs, which is why we will increase financial support for small and medium-sized enterprises by introducing a financial award of up to £500 a month per reservist when any of their reservist employees are mobilised.

The House will be aware that on Report in the other place, my right honourable friend the Secretary of State signalled his intention to accept in principle a change to the Bill to provide for some form of annual external scrutiny and reporting on the arrangements for the Reserve Forces. This is an important change that will ensure that Parliament has access to independent advice about the Reserve Forces and the regular opportunity to review these matters. Given this, the Government intend to bring forward a suitable amendment to the Bill in Committee.

I very much look forward to our debate this afternoon. I believe this Bill strikes the right balance between ensuring we deliver the military capabilities that our Armed Forces need and making sure that value for money is provided to the taxpayer. I therefore commend the Bill to the House.

I beg to move that the Bill be committed—