Defence Reform Bill — Second Reading

Part of the debate – in the House of Lords at 3:55 pm on 10th December 2013.

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Photo of Lord Palmer of Childs Hill Lord Palmer of Childs Hill Liberal Democrat 3:55 pm, 10th December 2013

My Lords, from these Benches we wish to associate ourselves with the tributes to our Armed Forces. The problem with this debate is that it is rolled up with a Statement from the other House. If we had had the Statement and a debate on it, we would have been able to concentrate on the GOCO arrangements, but we have a Bill with three definite parts, and I am delighted to see that both my noble friend the Minister and the noble Lord, Lord Rosser, have covered the whole Bill, not just the most contentious part of it.

My noble friend said that procurement was not good enough. In fact, I am afraid that procurement in the Ministry of Defence is not fit for purpose. There is a failure in the procurement process. The noble Lord, Lord Rosser, said that it should be brought to a speedy conclusion. Well, the Labour Government ignored it for 13 years, and they ignored it because it was a problem. It still is a problem. It was a problem then and it is a problem now. The coalition Government attempted to tackle it with innovative solutions that have not in fact worked out. Attempts were made to construct a system that worked, and we have concluded that the main thrust of that system will not work.

Mr Bernard Gray told us that, as director, he would solve the problem. I wonder whether the House is assured of the future when the Minister talks about continuity by having Mr Bernard Gray as the chief accounting official and chief executive of the DE&S-plus. Forgive me, but this is the man who told us that he would sort it all out and get it right. I just wonder, with due deference, whether we would not do better to have a completely fresh look at this and let Mr Bernard Gray reorganise something else. I hope that our Government will look at that again, because I certainly do not think that that would instil a feeling of confidence in the DE&S-plus system so ably enumerated by the Minister.

The problem in this area of the MoD is dealing with the major contractors. Our staff in the MoD are being outclassed by the major contractors, and by their lawyers, engineers and the like. My noble friend has indicated the efforts that will be made to bring our team up to a better standard, but the history of this has not been good. The other problem is making the wrong decisions about what is required, which was the problem for the 13 years of the previous Government and, sadly, to some degree the problem for this coalition Government.

The noble Lord, Lord Rosser, rightly spoke about costs to the bidders. Judging by the numerous pages of its bid, Bechtel clearly spent a lot of time on it, as did the other two unsuccessful bidders. I understand from the Minister’s comments that they will be involved in some way in the new DE&S-plus, but there must be some worries about that. The noble Lord talked about Part 1 not remaining in the Bill, but my plea is that it should stay in the Bill, with the proviso that we are not implementing part of the provisions that were made available on the GOCO arrangements in the Bill.

When the Minister replies, I hope that he will explain what provisions there are to make sure that this will not go through on the nod at some future date but will be brought back to this House—because, if it happens, it will be a major effort.

I shall concentrate in the rest of my comments on the most unexciting part of the Bill—Part 2, on single-source contracts—but we need to ensure that the Bill does not produce unintended consequences for the UK’s attractiveness as a place to invest. The Bill appears to allow the MoD to challenge the price of a contract at any point up to two years after the end of the contract. It will reduce predictability over contract price, with possible adverse consequences for boardroom confidence to invest, and the international perception of the UK as a good place to do business. Is the unintended end point of the proposed reform to be that suppliers refer their own contracts to the Single Source Regulations Office at the start of the contract to gain greater confidence over the price and the profit? At the moment, the whole contract can be changed at any point up to two years after it has finished.

The Bill states that the SSRO may make provisions that limit the number of times and the period after a contract ends when the MoD may challenge the price. It may also specify the grounds for a challenge. This is a first step, but the industry will need to have greater confidence in a firmer commitment. As we debate the Bill during its passage through the House, we need in this section a provision that the contractor should not be able to increase its price, and that the MoD should not be able to decrease the price: they will make a contract and, provided the product is up to standard, that is what it should be.

On the universal application of the regulations in Part 2, which allows the Secretary of State to exempt any contract from the new regulations, there are times when exemptions will be necessary, but defining the criteria for awarding exemptions would improve certainty for suppliers—and they will need that certainty. The possible exemption of contracts placed with overseas suppliers may place the UK suppliers at a competitive disadvantage globally. The stringent compliance and monitoring regime will place an additional cost burden on UK suppliers and their supply chains. Will the Minister address the issue of the possible creation of complex contracting arrangements, in which contracts are placed offshore in order to avoid the compliance and monitoring regime? The MoD agrees that there will be circumstances in which an exemption will be required, but these will not be defined in the regulations. That seems to be a weakness.

As to independence and impartiality, the Bill appears to allow the customer—the MoD—a significant degree of control over the regulator, the SSRO. The Secretary of State appoints the chairman and board and has a broad power to repeal the regulations and even to abolish the SSRO. Lack of industry confidence in the SSRO as an independent arbiter between the MoD and the industry is a risk. The industry would like to see further steps taken to bolster the independence of the SSRO, as it will fund 50% of the costs of that organisation and yet has no control over the potential cost growth of that body.

The MoD recognises the problem—and that may be part of the solution. The SSRO is independent, as it will be allowed to decide its processes outside those defined in the Bill. An industry representative will set on the selection panel for the chair of the SSRO. This part of the Bill certainly has more meat on it, and I hope that in Committee we will able develop it further.

I turn briefly to the question of reserves, in the hope that my noble friends Lady Garden and Lady Doocey will take it up in more detail. I will talk about the deployment and appeals processes, and what the Bill will do. Its provisions will place a greater burden on the employers of reservists by extending the circumstances in which reservists may be deployed. This will clearly have a business impact, particularly on SMEs employing reservists with unique skill sets. It is unclear to me—and it is not laid out in the Bill—how SMEs will be helped to replace such specifically talented employees.

The MoD intends to expand its cyber reserve. This may transfer expertise from the private sector to the public sector, as opposed to expanding overall expertise. Greater clarity is required on what steps will be taken to support the employers of reservists in these circumstances. The Ministry of Defence’s position appears to be what is set out in Section 78 of the Reserve Forces Act 1996, which allows the Secretary of State to enable a person liable to be called up to apply for a deferral or exemption. Again, when we deal in detail with the question of the reserves, we will need to make sure that employers feel confident that this is something that they can live with and that will not harm their businesses.