Defence Reform Bill — Second Reading

Part of the debate – in the House of Lords at 5:45 pm on 10th December 2013.

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Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords) 5:45 pm, 10th December 2013

My Lords, this has been a very interesting debate. One realised as one listened the extent of the knowledge of, and involvement in, defence over many years represented in the Chamber today. My credentials are somewhat modest. My noble friend Lady Cohen set out hers, but did not mention the role she handed on to me. I spent two very interesting years as a non-executive director of DLO, the defence procurement agency, and was involved in the merger that created DE&S.

I expected to be in the somewhat minority view, arguing for some respect and admiration for the quality of the people in DE&S, but I find that I follow the noble Lords, Lord Levene, Lord King and Lord Lee, the noble and gallant Lord, Lord Stirrup, and my noble friend Lord Davies in saying that these are good people doing a good job. As the noble Baroness, Lady Garden, pointed out, it is tremendously complex—a very big procurement job and one, as my noble friend Lord Davies said, in a constantly changing field. They are much underrated and I would certainly like to set down my name as one who admires them, as I admire the Armed Forces in general.

There has obviously been an ongoing challenge in defence procurement. We on this side accepted that general challenge and much of the direction the

Government were going in. We were willing to see a GOCO option if, through a process of competition, it could be refined into something credible that would do substantially more than DE&S being developed in a favourable environment. However, that competition went away. Only one bidder was left. Reluctantly, I welcome the decision—someone has to welcome the Government at some point—to abandon the competition and concentrate on DE&S. DE&S has the fundamental talent, provided it is supplemented. The noble Lord, Lord Levene, made the point that it would take a relatively modest number of additional people in focused roles to rise to the DE&S-plus challenge and meet the objectives that we all have in mind, and the needs of the taxpayer and front-line people.

We have a little bit of a mix-up today, with a debate on a Statement and a debate on a Bill. I have a few questions about the Statement. I will repeat some of the questions put by my noble friend Lord Davies because I informed the Minister about mine and expect him to answer them today. First, does the new entity require any legislation? As far as I can see, it does not. This can be done administratively within the present law. There is mention in the Statement about the accounting officer’s budget. Will that budget be merely for the operation of DE&S, or is this the procurement budget of £8 billion or £10 billion, depending on how you look at it? That is very important because if the accounting officer holds the budget he can, in a sense, insist on that firmer line between the front-line commands and the DE&S providers. Could the Minister also set out in more detail the new freedoms when it comes to pay? In other appointments over the past months, there has been talk that no appointment should be made at a rate that exceeds the Prime Minister’s salary. That will clearly be too limiting in this case. Are the freedoms such that that sort of arbitrary limit is not there?

We also have the very important issue of how appointments to these roles will be made. I think that the Secretary of State referred in the Commons to something like an accelerated system. We have spent a lot of time in this country worrying about public appointments. We have a Commissioner for Public Appointments, so at least some regard has to be taken for the work of that commission and how the new appointment process may give us better, faster results yet still meet the tests of fairness and opportunity that the public appointments commission represents.

To be very specific: how was Bernard Gray appointed? The Government have to be responsible for that appointment, but can we at least know how the decision was made and what public appointments criteria were checked off before it was made? We should know what Bernard Gray is to be paid because that will illustrate whether the Government are serious about breaking free from constraints in payments. It was perfectly reasonable at the time of the appointment of the Governor of the Bank of England that his salary and conditions were openly presented, and it should happen now.

Finally, in the Statement, which I will come back to, there is the concept that we might go for a GOCO at some time. Can the Minister offer some clarity on that? Are we talking about it being before the next election, immediately after it or further in the future?

Turning to the Bill, first, I join with other noble Lords in asking the Government most sincerely to withdraw Part 1. The intention of legislation must be to deliver a tangible outcome. You have to have a concept when you are working on creating it: what is it going to deliver? The legislation to create the GOCO is quite complicated—I will come to that—but at least there was something there. We had a White Paper about it and there had been some description and discussion of it. There was some background about the tangible thing that we were debating. We will not now be debating something that is going to happen in a near timescale. It will be a debate in a vacuum. It will almost be a philosophy seminar, as we will have to carry notions of “What if this?” and “What if that?”, and of how it fits together.

Finally, it will have the most undesirable effects on DE&S because it will be like a sword of Damocles. At the whim of a Minister, with no scrutiny from this House or the House of Commons, the whole issue relating to defence procurement can be transferred to a GOCO if we pass Part 1 of the Bill. I implore the Government to withdraw Part 1 and to let us spend our time concentrating on Parts 2 and 3. In the mean time, let us encourage DE&S to continue with its improvement programme, using its new freedoms. If the new freedoms need any legislation, of course that can be wound into it, but we should not have to contemplate or discuss a theoretical concept of such magnitude that it will have no impact within a near timescale.

Sadly, the Government will perhaps not listen to me and we will have to discuss the GOCO. As the noble and gallant Lord, Lord Stirrup, said, superficially it is not a magic bullet. We will have to work through a lot of questions. There are issues of conflicts of interest, the retention of sovereignty and the protection and supply of intellectual property. How will Chinese walls work within the various parts of the consortium that are also parts of larger firms? How will the civil and criminal penalties work in order to make these protections credible to the outside world? The concept was that it might go for nine years and then end. What will be done to require the GOCO company to protect skills, so that if those things are taken back into the public sector, the skills base will be retained?

We will need to look at the essence of why a GOCO is a good idea. When talking about GOCOs, the Government are tangentially talking about risk transfer; I believe that the Minister actually referred to it in the remarks that he made in opening the debate. Among my credentials is that I have been a client of Bechtel. I have to tell noble Lords that Riley Bechtel has never transferred one iota of risk. He is brilliant at running a firm that adds value—let us not get too upset about that—but the only thing that Riley Bechtel puts at risk is the size of his profit. He does not put Bechtel’s basic assets at risk. There will be no risk transfer if the Government’s target is someone like Bechtel. I am willing to be proved wrong on that, but if we must discuss Part 1 then we will be testing the Government on risk transfer.

We now come back to the question of added value. Sometimes when the Government talk about this, the added value seems to be solely about the ability to employ people. Suddenly, at a stroke, the Government seem to have solved the problem of employing people by getting new freedoms. But discussing the issue is very complicated without a tangible action in front of us.

I turn to Part 2 of the Bill. Superficially, single-source contracting is going to be pretty boring. However, anyone who has been involved in this area—not just the military but any area where de facto single-sourcing comes about—will know the value of getting this right. I will be interested in probing this and perhaps trying to get the Government to go somewhat further. At the moment the Bill seems to be written around a price mechanism, which will be a cost, an overhead and a profit. The mechanisms that are being brought forward to improve this are, principally—I think that this was in the Minister’s speech—transparency. The objective is to improve the balance between value for money for the taxpayer and reasonable profits for the supplier. We entirely accept that; we are not against suppliers making profits, as suppliers that do not do so do not continue to exist. There has to be that balance.

The process is to have the force of law in many areas. This is good. Indeed, the gains claimed for it are modest; they could be significantly higher. However, there will be questions about what transparency means and how confidentiality and IP are going to be protected. There is a real issue about information that flows about between groups, where one group is deemed to be a single-source supplier while another is perhaps trading in the international civil world.

We need to look carefully at the SSRO, and particularly at its independence. Creating independent bodies is a very difficult thing to do, as is actually creating some way of being sure that government influence is not there all the time. We will have to look at its independence, its balance and the reward structure for its directors—and, more importantly, at how we bring in the right talent. What is the appointment process going to be? What will be the quality of the people? What will its powers boil down to? I know that they are in the Bill, but they need to be picked over. Is it effectively an available arbitrator?

Should we go further? In my experience, people who have not been involved have a very silly idea about competition: they think that if you have real competition leading to a contract award, somehow you have solved the problem. Usually, 80% of the problem comes after the contract award. Things go wrong. Circumstances happen and change things. I have dealt with contracts for multiple hundreds of millions, and we have had so-called competition at the beginning; sometimes you are pushed to get two suppliers that are vaguely compliant in your bidding process, but you have your competition. However, you are then locked into a single-supplier situation. Can we think about how defence contracts that run on with a single-supplier situation can be brought into this area? What we need in this difficult area is more innovation so that we can go for more cost savings and can incentivise suppliers to improve—and they will feel that they are getting a fair deal and being properly rewarded.

Finally, on the reserves, we, of course, support a greater and more integrated role for the reserves, and the change of name. We note the logic that my noble friend touched on earlier: there will be a 20,000 reduction in full-time Army personnel. We hear that this is now planned and cannot be changed. We accept it, but bringing up the total number of Reserve Forces to 30,000 does not appear, initially at least, to be going well. We need regular reports. We look forward to the amendment that the Minister will be bringing forward in this area, but these reports have to go quite a long way further. We need to know not just about gross numbers but about where the skills are, how the training is going and what reduction in planning assumptions will result if we fail to recruit. What is the realistic capability of the Army if this recruitment does not take place, or if some of the problems, referred to by noble Lords, that reservists have when faced with the onerous burden of being in the reserve come to pass and we have difficulties?

Parts 2 and 3 are sensible pieces of legislation. We will have to pick them over, but they have lots of potential. The Government have wisely stepped back from the GOCO competition. They should now step back from trying to prosecute Part 1.