Report (First Day)

Defence Reform Bill – in the House of Lords at 2:59 pm on 24 March 2014.

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Amendment 1

Moved by Baroness Miller of Chilthorne Domer

1: After Clause 8, insert the following new Clause—

“Procurement of communications systems or services

Additional arrangements relating to procurement of communications systems or services

(1) To the extent that communications systems or services are procured for defence or related purposes under this Part (whether by the Secretary of State, Scottish Ministers or officers of other states resident in the United Kingdom) and those systems or services are used or proposed to be used for the purpose of interception of communications or processing of intercepted communications, it shall be the duty of the Interception Commissioner to report on the use or proposed use of those services or systems for any activity which may be subject to the provisions of the Regulation of Investigatory Powers Act 2000.

(2) In section 57 of the Regulation of Investigatory Powers Act 2000 (interception of communications commissioner), at the end of subsection (2) insert “; and

(e) the transmission of data through the jurisdiction and processing of data by means of any communication systems or services procured under Part 1 of the Defence Reform Act 2014 in the United Kingdom for defence (whether or not of the United Kingdom) or related purposes which has been obtained by interception, whether by—

(i) the Secretary of State or Scottish Ministers; or

(ii) officers of other states acting within the jurisdiction.””

Photo of Baroness Miller of Chilthorne Domer Baroness Miller of Chilthorne Domer Liberal Democrat 3:07, 24 March 2014

My Lords, I will take just a moment to remind Members of the problem that I am trying to address with this amendment—that is, that the ability to intercept communications has leapt ahead of the regulations governing them. However, that is a very broad area and I think it is generally accepted that the Regulation of Investigatory Powers Act needs a thorough overhaul. This amendment addresses just the update to governance that is needed in the area of defence procurement—the subject of this part of the Bill.

The capacity and scale of interceptions from the RAF bases used by our allies, the Americans, under the Visiting Forces Act means that Parliament must put something in place to be confident of a statutory basis for these interceptions. However, I emphasise that in no way should the amendment be seen as undermining of our relationship with our NATO allies or of the intelligence agencies—quite the reverse. It seeks to increase confidence among UK citizens that we are in compliance with international law and have a national legislative framework that respects citizens’ right to privacy while keeping abreast of threats and technological developments.

I raised this issue in Committee and, in tabling this more focused amendment, I have taken account of the Minister’s comments at that stage. Since Committee, both the Deputy Prime Minister and the shadow Home Secretary have made speeches highlighting the need to act quickly and decisively with regard to governance of the intelligence agencies and interception.

I welcome particularly my right honourable friend Nick Clegg’s announcement that the Royal United Services InstituteRUSI—has agreed to establish an expert panel to review the use of internet data for surveillance purposes. That panel will consist of a group of experts drawn from the worlds of intelligence, technology, civil liberties and the law, and it will be chaired by Professor Michael Clarke, the director-general of RUSI. The panel will look at the principles that ought to govern our use of surveillance, examine current practice and make recommendations for reform and, where necessary, new legislation. I am sure that the review will spend some time looking at the whole legislative framework.

This amendment does no more than try to plug a gap in the mean time in respect of how data are obtained from UK citizens and how they may be shared, stored and used. The DPM went to the heart of the matter in his speech to RUSI when he said:

“it is in all our interests to ensure that we can enforce the law in the online world in the same way we enforce the law in the offline world, targeting terrorist and criminal networks and preventing attacks from taking place, precisely to safeguard the free and open society that we want”.

Yet would our laws even apply as things stand? The facts about what is intercepted and stored by, for example, the NSA as opposed to GCHQ, are a matter of conjecture to most of us, certainly to me. No doubt many interceptions are joint operations, but just how do Ministers know which are which and what is going on? It is so that Ministers are precisely aware of what is being planned that I propose in this amendment a reporting obligation relating to the procurement of communications systems or services in the area of defence.

The amendment seeks to extend the existing reporting obligations of the Interception of Communications Commissioner to report on the use of all communications systems and services procured for defence purposes. This expressly includes systems used on US bases by officers of states who are in the United Kingdom. The proposal involves extending the remit of the ICC, as I have suggested in subsection (2) in the amendment. In doing this, I sought to take into account the Minister’s careful response to the more extensive series of amendments tabled by the noble Lords, Lord Hodgson and Lord Dubs, the noble Baroness, Lady Stern, and me in Committee. In particular, I accept the argument of my noble friend Lord Astor that an entirely new scrutiny group might not be necessary, with the caveat that we must therefore build on existing mechanisms to fill the gaps in regulation and monitoring of all communications systems in the UK. This modest amendment seeks to address those different points on which my noble friend Lord Astor, through absolutely no fault of his own, given existing regulation and the remit of the Bill, was unable to reassure us.

We were informed by the Minister when this issue was last debated in Committee that,

“under the Visiting Forces Act visiting forces are subject to UK law”.

In response to an earlier version of this amendment, which also sought to provide oversight by the Interception of Communications Commissioner of the activities undertaken at US bases on UK soil, my noble friend Lord Astor added that, if the visiting forces,

“ever wanted to undertake interception activities that engage the Regulation of Investigatory Powers Act—RIPA—a proper authorisation must be obtained. All such authorisations are already overseen by the Interception of Communications Commissioner, and he reports annually to Parliament and the Prime Minister on the exercise of those powers”.—[ Official Report , 5/2/14; col. GC 118.]

This reply puzzled me somewhat; perhaps I misunderstood it. I thought that US bodies or officers were not actually listed as those authorised under RIPA to apply for interception activity. With this in mind, I would be very grateful if my noble friend Lord Astor could explain whether and how such authorisations have been made. In addition, the reported scale of the interceptions would make the granting of such a volume of authorisations almost impossible.

The amendment would plug a gap in the oversight of these activities at such bases by providing an active duty of review to be undertaken by the ICC and his five trained specialist inspectors, who assist him in carrying out his duties. The amendment would therefore broaden the ICC’s remit, because currently, as I read it, the ICC does not have in his remit oversight of activity at US bases and looks only at,

“designated public authorities based in the UK”, and specifically does,

“not oversee the intelligence or security services”.

By giving the ICC, who is a highly trusted commissioner who already oversees very sensitive material, responsibility for reviewing intercept data transmitted through or processed in the UK, the amendment would help us to scratch the surface of the activities being undertaken at US bases in the UK.

Whether or not the Government feel that this is the right amendment for the regulation of the interception activity, the need for action in this area is now urgent. I am sure my noble friend the Minister is aware of answers in the other place to questions asked about RAF Croughton, which the US military describes as the headquarters for the provision of,

“world-class … communications and global strike operations”.

RAF Croughton has been reported as being linked to both covert drone strikes in Yemen and the widespread programme of NSA/GCHQ surveillance that is the subject of so much controversy in the United States and which President Obama has undertaken to take action on and, as he says, to rein in.

I am not sure that the Government’s position in maintaining in their Answer that,

“There is no requirement for an additional agreement regarding the use of RAF Croughton by the United States Visiting Forces”,—[Hansard, Commons, 10/12/13; col. 196W.]

stands up. The Government have also said:

The Ministry of Defence remains satisfied with the arrangement that is currently in place regarding the use of RAF Croughton by the US”—

I might mention also Menwith Hill—and that,

“The Department has no plans to review this arrangement nor review the activities undertaken by the US at the base”.—[Hansard, Commons, 26/11/13; col. 213W.]

In reply to my Written Question of 3 December 2013, my noble friend the Minister said:

“The requirement to monitor the compliance of US personnel at RAF Menwith Hill with the Regulation of Investigatory Powers Act 2000 is not contained within the terms of the NATO Status of Forces Agreement of 1951”.—[Hansard, 3/12/13; col. WA 41.]

Therefore, I submit that interception activity is not covered by SOFA, nor does the MoD have plans for a memorandum of understanding, which might go some way towards filling that gap.

Some of you will have read the advice of Jemima Stratford QC, which was written for members of the APPG on Drones. The advice, which I am happy to provide to any noble Lords who would like a hard copy, supports my amendment. It, and I, concludes that,

“pending review of the existing legislative framework, such amendments might go some way to ensuring that Ministers are informed about data passing through the UK. This, in turn, would help the government monitor compliance with UK law and make informed decisions about whether there is a need for an MoU or other multilateral agreement between NATO partners”.

I beg to move.

Photo of Lord Rosser Lord Rosser Shadow Spokesperson (Defence), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Transport) 3:15, 24 March 2014

As the noble Baroness, Lady Miller of Chilthorne Domer, said, she also raised the issue of interception capabilities in Committee when she referred to concerns over the relevance of existing legislation in the light of rapid advancements in technology, the level of application of that technology by in particular American forces operating from UK soil and the extent to which UK law did or did not apply to them.

The amendment moved by the noble Baroness does of course refer to,

“officers of other states resident in the United Kingdom”, and officers of other states acting within the jurisdiction.

I presume, therefore, that the amendment is nation-neutral and is intended to refer equally to other countries, although I am not sure that it is intended to cover any such activities being undertaken by, for example, embassy officials of such other countries.

As far as the United Kingdom is concerned, the Interception Commissioner, as I understand it, already monitors intercepted data, including of the Ministry of Defence, so I assume that is not the real issue since that individual reports annually to Parliament and to the Prime Minister. The Government have stated that if visiting forces want to undertake interception activities covered by the Regulation of Investigatory Powers Act a proper authorisation must be obtained, that such authorisations are overseen by the Interception of Communications Commissioner, and that covert surveillance powers are subject to separate oversight arrangements through the Chief Surveillance Commissioner.

In relation to foreign military personnel, the extent to which they are exempt from local jurisdiction is regulated through status of forces agreements negotiated between the sending and the host nation, which allow a sending state’s military forces to operate within, and at the consent of, the host state.

In 1951 NATO agreed a status of forces agreement covering hosting arrangements between the alliance’s member states, and thus from our perspective applies equally to visiting forces in the UK and to British forces based in NATO countries. The 1952 Visiting Forces Act incorporated the NATO status of forces agreement into UK law. The Act and the agreement provide for foreign laws and military discipline to apply to foreign military personnel in the UK, but such personnel are still subject to UK law, and this arrangement applies equally to our forces when they are overseas. The 1996 Armed Forces Act extended the Visiting Forces Act to third countries by Order in Council.

The Government have said that the US visiting forces are thus subject to both US and UK law. At present I believe that around 9,500 US military personnel and supporting civilian staff are permanently based at various locations throughout the United Kingdom.

Most UK military bases involved are used by the United States Air Force, but RAF Menwith Hill is used by the US National Security Agency. The United States visiting force is responsible for internal security at the bases that have been made available to them. The parliamentary Intelligence and Security Committee has oversight of the intelligence activities undertaken by RAF Menwith Hill, and the Government have stated that the mission at RAF Menwith Hill is conducted in accordance with UK law and with the knowledge and consent of the UK Government. The United States visiting force also declares its inventory of weapons in the UK annually to the MoD, which ensures that all weapons are appropriately licensed and stored, and the storage of US munitions on bases in the UK is governed by a 1997 agreement between the UK and the US.

I listened to the concerns raised by the noble Baroness, Lady Miller of Chilthorne Domer, just as I listened to the Minister’s response in Committee, when he gave the Government’s assurance that oversight mechanisms were in place and covered any person subject to UK law performing such activities in the UK. Clearly the Government have a responsibility to make sure that appropriate arrangements are in place to ensure that we know what is going on in our own country in the field of military and security activity, including interception of communications and surveillance, and that what is happening conforms to UK law. That means that the Government have to satisfy themselves that both oversight mechanisms and the law continue to keep pace with increasingly sophisticated technological developments. I hope that in responding the Minister will be able to assure us that that is, and indeed will continue to be, the case, not only because a Government must know what is going on within their own borders in these vital areas, but to address some of the questions and concerns raised by the noble Baroness, Lady Miller, in moving her amendment today.

Photo of Lord Palmer of Childs Hill Lord Palmer of Childs Hill Liberal Democrat

My Lords, I thank the noble Baroness, Lady Miller, for raising and giving an airing to this subject. I can only hope that this will not be the end of the discussion of this important matter. The point was made as to whether this amendment was within the remit of the Bill. I like to think that this is going to be not one that we will necessarily vote on today, but one that we will come back to in greater detail bearing in mind the reply from my noble friend the Minister.

The noble Lord, Lord Rosser, went into great detail, and I certainly do not intend to repeat his comments, but I share many of his concerns about the assurances that he seeks. Do my noble friend the Minister and the Ministry of Defence believe that, with our reduced Army, Navy and Air Force, we are more vulnerable without such interception? No one likes the breaking of privacy and no one likes secrecy, but with our Army being reduced by 20,000, our Navy by 5,000 and our RAF by 5,000 personnel, and with the increase in the Reserve Forces, which we will deal with later in the Bill, rising very slowly to reach the 30,000 level, how important is that interception, and how important is it that it is reported and transparent, as my noble friend Lady Miller asked?

That is brought very much to the forefront of our minds with the problems in Ukraine. What help or hindrance does such interception cause in the present climate of hostilities? Overall, how should such transparency be effected on forces such as those of the United States operating on UK soil?

Photo of Lord Astor of Hever Lord Astor of Hever The Parliamentary Under-Secretary of State for Defence

My Lords, Amendment 1 deals with the issue of interception of communications and follows on from the amendment on the issue that we considered in Grand Committee.

As I am sure that my noble friend appreciates, the issues that she has raised this afternoon, although important and interesting, are not entirely related to the Defence Reform Bill. In fact, the Interception of Communication Commissioner’s Office—the role and powers of which are covered by the amendment—is the responsibility of the Home Office, rather than the Ministry of Defence. I hope that she will therefore understand if I do not respond to all the points that she raised. In particular, as the Prime Minister recently made clear in the House of Commons, intelligence-sharing between the UK and its allies will not be discussed in public. I will, however, try to cover those aspects of the amendment that deal with defence matters and to touch upon the wider points where I am able to do so.

I can give my noble friend and other noble Lords an unequivocal assurance that the Government are fully aware of the activities at US bases in this country and that interception activity in this country is subject to the full rigour of oversight provided under RIPA. We all know that there is intelligence co-operation between the UK and US Government and that that is a key component of our relationship with them. I will not be drawn into commenting on the specifics of that co-operation, but I can confirm that operations at the base that my noble friend mentioned are carried out in accordance with United Kingdom law.

The amendment is in two parts. The first would require the Interception Commissioner to report on the use or proposed use, subject to the Regulation of Investigatory Powers Act 2000, of services or systems procured for defence purposes. However, the Interception of Communications Commissioner is already required by Section 57 of RIPA 2000 to keep under review the issue of RIPA 2000 interception warrants. Therefore, the additional legal effect of this part of the amendment would be to impose a requirement on the commissioner potentially to be involved twice for the same interception. He would be required to comment once in reviewing the use and proposed use of equipment to intercept communications, and then again when reviewing the actual issue of any subsequent interception warrant. Therefore, this part of the amendment is unnecessary; it provides no additional scrutiny, and could, in some circumstances, introduce uncertainty and lack of clarity. This would be an unhelpful extension of the commissioner’s remit, which, as it stands, is clear and distinct.

The second part of the amendment would amend Section 57 of RIPA 2000, so that the commissioner would be required to keep under review the transmission of data through the jurisdiction and processing of data by means of any communication obtained for defence or related purposes, by systems procured under what—I hope—will become Part 1 of the Defence Reform Act 2014. The commissioner is already required, by Section 57 of RIPA 2000, to keep under review the issue of RIPA 2000 interception warrants. It is an offence to intentionally, and without lawful authority, such as that of a warrant, intercept—at any place in the UK—any communication in the course of its transmission. This amendment would require the commissioner to keep under review a new category of non-interception activity—transmitting and processing intercept data—in respect of data that have been intercepted.

This broadening of the commissioner’s remit is undesirable for two reasons. First, the inclusion of transmission and processing material would not provide any additional scrutiny of activity. By definition, any material that is transmitted or processed must first have been intercepted, and is, therefore, already subject to the commissioner’s oversight. Any material that is processed or transmitted would either have been legally obtained under a warrant that would have been issued under the existing RIPA powers, or unlawfully obtained, in any situation where it had not been collected in accordance with a warrant or some other lawful authority. If it has been obtained lawfully, this amendment would provide no additional safeguards. If obtained unlawfully, normal criminal proceedings would apply, with no requirement for further involvement by the commissioner.

The second reason why the Government cannot accept this part of the amendment is similar to the basis on which we opposed the amendment’s first part: that it would introduce a lack of clarity into the commissioner’s role. The commissioner’s office is not currently staffed, trained, organised or equipped to monitor transmission and processing as well as the legality of the production of warrants for interception. I need to be clear that I am not arguing simply that the commissioner has not got enough money. It is a matter not of resources but of clarity of purpose. Transmission and processing are areas of activity that are very distinct from interception in the way they are carried out and scrutinised legally. Effective oversight of transmission and processing is an activity which is primarily technical, rather than legal. It is one for which the office of the commissioner would not be equipped, given its current role—which is to ensure that activities are carried out in accordance with the law.

These proposed new areas of oversight are so distinct from interception that to introduce a requirement to monitor these activities, as well as interception itself, would introduce the risk of the commissioner’s oversight losing focus, and could therefore, perversely, impair the commissioner’s ability to perform its primary role.

In conclusion, I appreciate the efforts the noble Baroness has made to tie the amendment as closely as possible to the Bill, by adjusting the wording from that which she used in Grand Committee. We have had a debate this afternoon but I hope she will understand that I cannot accept the amendment, for the reasons I have outlined. I therefore ask my noble friend to withdraw it.

Photo of Baroness Miller of Chilthorne Domer Baroness Miller of Chilthorne Domer Liberal Democrat 3:30, 24 March 2014

My Lords, first, I thank the noble Lord, Lord Rosser, for his thoughtful, thought-provoking and informative reply, from which I hope to have gained a lot more food for thought. Between us, we have managed to move the debate on this afternoon. I very much thank him for taking the time and effort to analyse the issues that we are looking it. I also thank my noble friend Lord Palmer of Childs Hill for his support because this matter really goes to the heart of that balance of which I spoke, between security and privacy.

I also warmly thank my noble friend the Minister. I realise that his reply labours under the difficulty of the amount that he is not able to say. He has given, as far as he is able to, some of the assurances that I was seeking. The difficulty is that there is so much that we cannot possibly know that it is very hard to imagine that we will ever be able to legislate adequately for the technological advances that have been made. That is the challenge before us because at some stage we are going to have to update RIPA, and even where it crosses into areas of defence it will have to be within a legislative framework.

The Minister made one particularly useful and interesting comment that I picked up on. That is the fact that some of this falls under the jurisdiction of the Home Office and some under the jurisdiction of the Ministry of Defence. Again, when we come to legislate that is a real issue because its effect is to leave a bit of a hole in the middle down which things can disappear. Also, had we had something about procurement and expanding defence capability back in about 1990, then what was going on and being built at Menwith Hill might have created a bit more of a stir about what was being procured there and for what purposes. There was some debate that it was for missile defence; I am sure that some of it is but some of it is for other purposes. The Intelligence and Security Committee may be aware of those purposes but of course many of them are poachers turned gamekeepers, which poses another challenge.

In concluding, I pay tribute to the Campaign for the Accountability of American Bases, which is based up near Menwith Hill. This is about accountability. It is not asking American bases to go home but saying that they should be accountable to the UK. Without that campaign, some of these issues would be much harder to keep our eye on from Westminster. However, I thank noble Lords for giving us the time during this important Bill and, in the mean time, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Clause 14: Regulations relating to qualifying defence contracts

Amendment 2

Moved by Lord Tunnicliffe

2: Clause 14, page 9, line 30, after “state” insert “for Business, Innovation and Skills”

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords)

My Lords, we now come on to Part 2 of the Bill. I would like to acquaint the House with my interests in this from my history. In 2008, I was working for Defence Equipment and

Support, and I therefore tend to come at the problems being tackled in Part 2 from perhaps a wider direction than is typical.

At this point, I also thank the Government, particularly the Parliamentary Under-Secretary of State, Philip Dunne MP, the noble Baroness, Lady Jolly, and their civil servants and advisers, for the enormous amount of time that they have given to Peers in general and ourselves in particular in scrutinising Part 2. We therefore have only three groups and five amendments, because we have done all the probing—“What do these little clauses mean?”, et cetera—in those detailed meetings. The way that the Government handled that is highly commendable.

Before we move on to the amendments, it would be useful to pause and look at the problem that we are trying to fix. The Ministry of Defence procures between £6 billion and £8 billion-worth of equipment each year through contracts which are sourced by a single-source supplier. Why does it do this? It does it for the harsh practical reason that, in order to secure sovereignty, it has to cede monopoly. Why does it have to do this? It has to do this because defence technology cannot be this much-dreamed-about, off-the-shelf idea; you need your technology to be at the leading edge, and frequently the only people you can buy leading-edge technology from are your own suppliers. You use your own suppliers to assure security of supply.

The problem with these large contracts is that any vestige of competition recedes as the contract proceeds. The world changes and the Ministry of Defence is left with the harsh choice either to cancel or to pay more. These contracts are also very big. Taxpayers, not unreasonably, often feel that they have got a bad deal. This is compounded by the fact that contracts are frequently obscure and opaque—they are certainly not transparent. I would, en passant, like to commend the Government for the provisions in Part 2 that relate to the reporting regime, which we completely support and believe is an important step forward.

As I say, the people who tend to get blamed for this are the Ministry of Defence, civil servants and serving personnel who work in DE&S. We have to see the size of the problem of managing contracts of enormous size, difficulty and complexity over many years. The Government’s reaction to this was to ask the noble Lord, Lord Currie of Marylebone, to produce a report—which I have read and commend—and to invite a team of civil servants and at least one adviser to produce legislation to address the issue. That legislation is Part 2 of the Bill.

What Part 2 is trying to do is neatly summed up in the provisions referring to the Single Source Regulations Office: the aim is to ensure,

“that good value for money is obtained in government expenditure”, and,

“that persons … who are parties to qualifying defence contracts are paid a fair and reasonable price”.

That is the objective, and the Opposition commend the Government’s efforts in this area. We support the generality. Part 2 is a good attempt but not good enough. That is why we have three groups of amendments on Part 2, which will focus on: the independence of the Single Source Regulations Office; the misuse of target cost incentive fees; and the focus on allowable costs.

Amendment 2 relates to the independence of the Single Source Regulations Office, or at least our solution to what we think is not its independence but its apparent independence. It is important to understand how Part 2 works. My interpretation of the way Part 2 works—probably the Government will put me right in a minute or two—is that it puts a straitjacket or constraint or series of rules on how government can behave in these contracts and hence prevent itself by law from being bullied by big suppliers. It is quite a complicated thing to do. You would think, “Well, why don’t you just tell them not to be bullied?”. Of course, in the heat of the moment, when an urgent requirement is coming through, when you have got to do the deal, when it is a matter of national security, it is very difficult to resist the bullying of a big and powerful supplier. The essence of Part 2, as I read it, is to create this framework or the straitjacket that officials will have to work within when they complete these qualifying contracts.

Right at the centre of Part 2 is the Single Source Regulations Office, the SSRO, which has an immensely important role. The two aspects that I would pick out are its responsibility for analysing the data—overlooking the contracts and creating some of the parameters within which they are created—and making rulings. This analysis and these rulings are very significant for the financial impact on the contractor and, conversely, the other side of the coin, on the taxpayer. The SSRO stands between the MoD and the contractor, and its very essence is that not only is it independent but it must be seen to be independent. It is the Opposition’s contention that it is not independent enough and certainly not seen to be independent enough.

I will constrain myself to proving my points, because we had a very good debate about this in Committee. I commend to anyone who wants to see the sources of the comments that I am going to make—and I do not think that the Government will challenge any of them—the Hansard of the Grand Committee of 25 February. The essence of the issue is that the Secretary of State appoints the non-executive chairman through a process that involves: asking a panel to seek to recruit capable people; from those capable people, the panel determines those who are sufficiently good to do the job; a list of names is then given to the Secretary of State, and he then chooses the chairman. The appointment is within his discretion, once the individuals have passed the appropriate fitness test. He also appoints the other non-executive members of the board; he decides on the reappointment or not of the chairman and the non-executive members; he decides their pay; he approves executive appointments; and he determines the SSRO’s budget. While technically he does not control the pay of its staff, one of the two very useful letters from the noble Baroness, Lady Jolly, on 4 March 2014, says:

“The Bill does not impose any legal constraints on pay for the SSRO employees but, as with all non-departmental public bodies, the Government would expect the SSRO to comply with the relevant Cabinet Office guidelines”.

I ask noble Lords to imagine a situation where they are standing between two very powerful bodies, the industry and the Government. The difference between these two parties is that the individual responsible for the department spending between £6 billion and £8 billion, on which your rulings will have significant impact, appoints you, pays you and decides your budget, whether you are reappointed, who your people are, how big your budget is and, effectively, influences how much you pay people. In my view, this is not sufficiently independent.

We had some debates on this topic in Grand Committee. I commend the noble Baroness, Lady Jolly, on making the unambiguous statement:

“The creation of an independent body is absolutely central to the success and longevity of the framework”.

I could not agree with her more. She made a series of statements to try to make me feel good about it. There was a lovely little paragraph at the end:

“There will be a framework agreement established between the MoD and the SSRO that sets its budget, in accordance with HMT’s guidelines in Managing Public Money and performance targets”.—[Official Report, 25/2/14; cols. GC 330-31.]

What those performance targets are going to look like I do not know. One has a slight, itsy-bitsy worry that the Treasury might have as a performance target, “Try minimising the cost to the Treasury”, which of course would not make it very independent.

An area where I probed a little in Committee was whether the Ministry of Defence was going to put in place any mechanisms to try to put some space between the SSRO and the Ministry of Defence. I do not work in the City, but I will risk the term “Chinese wall” type things. You need to have control of the communications. I posed the question: what would be the characteristics of the communication between the Secretary of State, his staff and the chair of the SSRO, the chief executive officer and the staff of the SSRO? The noble Baroness, Lady Jolly, did not produce a response at the time but went away and carefully thought about it and produced a response in her letter of 4 March 2014. In the letter addressed to me, she said:

“Specifically, you asked if the Secretary of State or MOD staff would be able to communicate with the Chair of the SSRO, or his/her staff. I can confirm that we do not envisage any bar on communication between the Department and the SSRO, indeed, we would see regular exchanges as a positive and constructive development … I suspect that it would be a relatively infrequent event for the Secretary of State to write directly to the SSRO … but I do not accept that such correspondence would be harmful or an indication of the Secretary of State seeking to influence the SSRO unduly”.

The SSRO, we are told, is a small organisation—I got the impression that it would be something like 30 to 50 people. What are they going to talk about, with regard to an organisation of 30 to 50 people, other than the rulings and analysis that the SRRO generates? If your boss talks to you about the rulings you produce, how can that not be a situation in which you do not feel influence?

As if to really cheer me up, the noble Baroness, Lady Jolly goes on—she writes a lovely letter, I must say—to state:

“I suspect”— not “guarantee”; not “assure”—

“that the Chair will be energetic in defending both the reality and the perception of independence on behalf of the new body in order to underpin its credibility”.

Given the power of the SSRO, I contend that, sat in the MoD with the Secretary of State having this range of powers, it is not sufficiently independent.

We looked at some of the other solutions in government, and there are a variety of solutions, although I did not research them in any great depth. I believe that the Comptroller and Auditor-General of the National Audit Office is appointed for only one term of 10 years, so he is not very susceptible to influence. I think the Governor of the Bank of England was going to be something like eight years, but the new governor said that he wanted only four, or something like that. Nevertheless, there is a mechanism in that Act to give the individual a sense of security. The OBR, I believe, has some mechanism related to the Select Committee. We looked at this range of options but ultimately felt that we should go for a simple option that had already been considered by the noble Lord, Lord Currie, and, as far as I can see, was rejected only because the department in question said that it did not want to do it: putting this organisation in another part of government. Therefore, our recommendation is that the SSRO be placed in the Department for Business, Innovation and Skills.

We have done this because BIS is a big department with experience of regulation. It presently has the Competition and Markets Authority in it—the Office of Fair Trading is morphing into that together with the Competition Commission and the Competition Service. It has this type of experience of balancing regulation. It has some involvement with defence through UKTI. It has tribunal experience. It actually has 49 agencies and public bodies, including the Central Arbitration Committee, the Competition Appeal Tribunal, the Copyright Tribunal et cetera. It has adjudication experience. It is responsible for the Groceries Code Adjudicator. We thought it was a simple solution to recommend that the SSRO be placed in the Department for Business, Innovation and Skills.

The other amendment in this group is Amendment 3, which speaks to Clause 14(7). Here, we just want to put into law the very straightforward assurance that the noble Baroness, Lady Jolly, gave in Grand Committee:

“To summarise, we expect the Secretary of State to use his exemption power only in exceptional cases”.—[Official Report, 25/2/14; col. GC 340.]

I lighted upon Clause 14(7) because it is one of those very typical subsections that government puts in legislation, which, roughly speaking, say, “Notwithstanding the above, the Secretary of State can exempt everything”. We have had an assurance that the exemptions will be exceptional; we would like to put that in the Bill, and we commend that to the House.

We have also had some discussions about exemptions, which were put on the record in Grand Committee. However, a specific set of exemptions were sought by industry, to which the noble Baroness, Lady Jolly, responded in her letter of 19 March. Those exemptions relate to that exemption being used in the case of—for want of a better term—call-off contracts: things which have a determined external price. That seems to be a perfectly good exemption. Perhaps the Minister could say a little more to reinforce that it will be used in that entirely practical area, which is an area where industry would value a little additional exemption. I beg to move.

Photo of Lord Palmer of Childs Hill Lord Palmer of Childs Hill Liberal Democrat 3:45, 24 March 2014

My Lords, I welcomed the letter from the Minister. It gave a lot of confidence, which is needed not only by Members of your Lordships’ House but by contractors, who I am sure were worried about changes in circumstance and the new organisations that they would have to deal with.

These sections of the Bill talk about how both the Government and the contractor cannot be bullied; the question is whether they have the correct balance. The balance is pretty good. I have great confidence in my right honourable friend the Secretary of State for Business, Innovation and Skills, who I am sure would deal with this admirably within his department. However, these contracts are very MoD-based, and there ought to be the ability within the MoD to deal with this probably in a better manner than the Department for Business, Innovation and Skills.

Who should deal with defence: the MoD or Business, Innovation and Skills? I would like the Minister to take back to his department the question of whether there should be more co-operation between Business, Innovation and Skills and the MoD. There are skills in that department which the MoD would do well to emulate, such as regarding how contracts under EU regulations are dealt with. BIS deals with that better than does the MoD.

As regards inserting an organisation other than the MoD in the management appointment of SSRO, I understand the fears. There is a fear when the organisation that is appointing you is the one you are criticising—that point was well made. However, someone has to be in that role, and there is no better organisation for it than the Ministry of Defence.

Photo of Baroness Jolly Baroness Jolly Baroness in Waiting (HM Household) (Whip) 4:00, 24 March 2014

My Lords, as the noble Lord, Lord Tunnicliffe, explained, the intent behind the proposed amendment is to increase the independence of the SSRO by giving BIS responsibility for the regulations relating to qualifying defence contracts. As we have made clear on countless occasions during the progress of the Bill, and indeed in positive meetings with noble Lords—we have met quite frequently to discuss this, so I am glad the noble Lord found that helpful—the Government are fully committed to the independence of the SSRO in order to achieve value for money for the taxpayer. The SSRO will succeed only if it is, and is seen to be, fair to both parties. If it is too biased towards the MoD we risk driving the best suppliers out of the market. It is precisely the need for an independent moderating authority that led the MoD to propose the creation of the SSRO in the first place.

In Committee the noble Lord, Lord Tunnicliffe, pointed out that the SSRO chair and other non-executive directors are appointed and potentially reappointed by the Secretary of State. The Secretary of State sets the budget for the SSRO and can abolish it if he, or she in the future, so wishes. The noble Lord considers that that gives the Secretary of State considerable leverage. It would perhaps help if I were to explain in detail the context of our approach to the SSRO. In framing the legislation, we wanted to give the SSRO as much freedom as possible, including the ability to recruit its own staff. We did not want the SSRO to be a servant or agent of the Crown. These requirements have led to it being designated a non-departmental public body—NDPB.

Considerable public attention has been paid to NDPBs over the past few years, and substantial guidance has been developed. This includes the requirement that they must be allocated to a department, and the Secretary of State of that department must appoint the chair and the non-executives of that body. This department must also pay for the NDPB, which is why the MoD must set the budget for the SSRO. As to the ability to abolish the SSRO, this has been included in Clause 40 which relates to the termination of the whole of Part 2. This power will be used only if there is a desire to repeal the entire framework and revert to a non-statutory approach. In either case, the SSRO will no longer have a role, so the power will exert no leverage over the SSRO.

I turn now to what we have done to ensure the independence of the SSRO. The independence of the chair and other board members is essential, so I hope that noble Lords will forgive me if I describe the recruitment process in detail. To ensure that this appointment will result in a suitably independent and unbiased person, we are running the process in full accordance with the guidelines of the Office of the Commissioner of Public Appointments—OCPA. The recruitment panel for the chair is headed by a public appointments assessor, who has been chosen for us by OCPA. Also on the recruitment panel is an independent person suggested by OCPA and approved by the public appointments assessor. There are two others on the panel—one MoD official, and a representative from industry, Mr Paul Everitt, the CEO of ADS, one of the industry trade bodies for the defence sector—so only one of the four members of the interview panel will be from the Government.

A similar recruitment panel, with the addition of the chair, will be used to select the other non-executive directors. There are additional requirements for suitable candidates. They must not have come recently from the MoD or a defence supplier. Together they must represent a balance of private and public sector experience. They must have between them a variety of relevant experience: for example, legal or regulatory expertise, and experience of acquisition within the price sector. This is a rigorous appointment process, and I am confident that the result will be an independent SSRO board.

Having a suitably independent and strong chair will safeguard the independence of the framework, and we have tried our best to achieve this. This is further backed up by guaranteed freedoms. The SSRO is largely free to determine its own procedures, including making committees. The exceptions to this are where procedures are laid out in the Bill, and the requirement to run a full public consultation in support of the quinquennial review, which will be included in the framework document between the MoD and the SSRO.

In addition, the SSRO, like all public bodies, will be subject to external scrutiny by organisations such as the Competition and Markets Authority and the National Audit Office. Moreover, the SSRO chair can be brought before a parliamentary committee at any time. All these points highlight the considerable efforts we have made to ensure that the SSRO will be independent and subject to appropriate public and parliamentary scrutiny. The fact that the Secretary of State appoints the chair and that he can dissolve it are not what will determine the independence and impartiality of the SSRO. While we fully share with the noble Lord his aspiration of protecting the independence of the SSRO and the framework, we do not believe that this amendment is a necessary or effective means of achieving it.

In terms of practicalities, the Ministry of Defence will be the sole government user of the single-source procurement framework. It already has the technical expertise, the understanding and the necessary contacts with the defence industry to understand how the framework will operate in the real world. While the Department for Business, Innovation and Skills would undoubtedly be able to develop the required level of knowledge and expertise, it would take considerable time, effort and cost to create and would, in effect, duplicate the existing capability of the Ministry of Defence.

Moreover, it is normally the case that a single government department acts as the sponsor for a regulatory authority. This amendment would have the effect of splitting this between BIS, which would be responsible for the regulations relating to qualifying defence contracts, and the Ministry of Defence, which would be responsible for all other aspects, including the application of civil penalties. This would create an unhelpful degree of confusion and inconsistency, especially with regard to relations between the Government and the SSRO.

By creating the SSRO, we will increase the number of parties involved in single-source procurement from two—the MoD and the supplier—to three. Adding BIS as a fourth party would add confusion. For example, a supplier might lobby BIS for a change rather than the SSRO, and BIS might seek the MoD’s opinion on a matter rather than trust the SSRO’s recommendations. It is true that BIS has a similar role with regard to other regulators, such as Ofcom, but in such cases BIS is acting as a moderating body between the privatised suppliers and the public. In the case of the SSRO, however, the proposed amendment would place BIS in the position of setting statutory pricing and procurement rules of which the MoD is the sole user. BIS would thereby become the moderating body between private industry and another government department. This would create a potentially unhelpful relationship.

I will make a final point on premises and the issue of independence. I reaffirm what I said in Committee, which was that the SSRO, although it will be on government estate, will not be co-located within the Ministry of Defence. In developing this piece of legislation, the MoD has consulted extensively with industry over a prolonged period. There has been no suggestion from industry that it would see any advantage in having BIS own these regulations. Indeed, the Minister for Defence Equipment, Support and Technology, Mr Philip Dunne, recently met with Mr Paul Everitt of ADS, who said that industry no longer had any concerns over the independence of the SSRO.

The noble Lord, Lord Tunnicliffe, asked about a couple of points, including performance targets. Targets are there to ensure the efficient operation of the framework and the organisation. They are likely to relate to how quickly the SSRO responds to opinions or determinations made by the MoD or the supplier. He requested clarification on communications between the Secretary of State and the SSRO. If they are not on ruling, what sort of communications will they be? The SSRO will be responsible for keeping the framework under review and this will require communication with the Secretary of State or his officials to discuss any matters relating to the performance of the framework of the SSRO. The SSRO will have similar communications with industry.

On Amendment 3, as I stated, the purpose behind Part 2 is to ensure that in exchange for providing suppliers with a fair and reasonable price, the MoD will receive value for money for the goods and services it obtains through single-source procurement. Here we are in complete agreement. This works in two ways. First, it does this by establishing pricing rules that must be followed by the MoD and suppliers and by giving the SSRO the power to adjust the contract price if these rules are not complied with. This places a direct obligation on suppliers to use only appropriate and reasonable pricing assumptions.

Secondly, the Bill imposes transparency requirements which will allow the MoD to monitor suppliers’ costs: for example, ensuring that cost increases are highlighted in good time. These transparency provisions will allow the department, over time, to generate pricing benchmarks for goods and services. In turn, this will help the MoD to negotiate with industry over prices and to press for tough but reasonable efficiency targets. As it is in the interests of the MoD that these two features are applied as widely as possible, we fully expect that the Secretary of State for Defence will use the powers of exemption set out in Clause 14(7) only on an infrequent basis.

In Committee, I provided examples of where we envisage that the use of exemptions might be justified. However, I will summarise them again for the benefit of the House. The first circumstance is where there is no market failure. The framework addresses the situation where a contract price is not subject to the competitive pressures of the market. If those pressures are evident in the contract price, the framework is not required. An example is the purchase of additional items that are already available in the civil market, such as computers.

The second circumstance is one of national security. The Bill provides for some categories of contracts to be automatically excluded from the framework. One of the categories identified in the draft regulations is when the contract is for the purpose of intelligence activities. These exclusions apply only if the whole contract is covered by one or other of the excluded categories. So in the case where a significant part, but not all, of the contract is for intelligence activities, the contract would not be automatically excluded from the framework. As transparency is a significant part of the framework this is unlikely to be appropriate, so the whole contract may require exemption by the Secretary of State.

The third circumstance concerns our relations with other nations. Some of the standard reports would give us sight of a supplier’s plans for the key industrial sites sustained by MoD’s single-source procurement, which could result in a supplier having to reveal the forecast throughput assumptions of facilities that are used predominantly by a foreign Government, thereby exposing that country’s defence planning assumptions. This is likely to be treated with considerable reluctance by the foreign Government and therefore may require use of the exemption.

These are strong, valid reasons for the Secretary of State requiring this exemption power. However, not all the potential cases might be classed as being exceptional, as set out in the proposed amendment. Let us take, for example, the case where the market failures addressed by the framework are not present. It might be useful if I quoted the hypothetical but plausible example of where the department wishes to buy additional desktop computers. In the interests of operating only a single type, an open competition might be undesirable. However, in this example we do not need the full protections Part 2 offers to confirm that the price being offered to the department is fair and reasonable; we can simply compare it with the market price. This may be an unusual case as it requires a contract to be single-sourced yet fully priced using market prices. There would be a valid case for using the exemption powers, but it would be hard to argue that this constitutes exceptional circumstances.

We do not wish the Secretary of State to be constrained by how the new regime is applied in this way, but given that it is in the department’s interests that as much single-source procurement activity as possible is covered by the framework, the fewer exemptions there are, the greater the benefits there will be to the MoD.

I hope that this explains our position and therefore I urge the noble Lord to withdraw his amendment.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords)

My Lords, I thank all Peers who took part in this debate, and in particular the Minister for her various assurances. I have faith that the people currently in the Ministry of Defence will undoubtedly use the right mechanisms to select the chairman of the SSRO and the individuals who are its non-executive directors. The pressure, which I am sure the present Administration would not bring to bear on the SSRO, will nevertheless come from all the subtleties. I speak as somebody who has chaired a nationalised industry, and who has been the chief executive of one and therefore on its board. The most subtle pressure comes from something that is entirely within the discretion of the appropriate Secretary of State. The Commissioner for Public Appointments, whom the Minister quoted, stated in a recent press release:

“The Public Appointments Commissioner plays no part in a decision not to re-appoint someone at the end of their term of office. That is a matter for Government”.

As we have seen recently in the case of Ofsted, the Government exercised that privilege without recourse to any mechanisms or checks. Everybody will try to do the right thing in these circumstances, but at the end of the day “not being reappointed” is a code for being fired, and being fired can engage the mind rather firmly. I believe that we should do more to distance the SSRO from the Ministry of Defence; the solution that we have chosen is the best one, and because it is important that the Government understand the wisdom of our words, I beg leave to test the opinion of the House.

Division on Amendment 2

Contents 169; Not-Contents 227.

Amendment 2 disagreed.

Division number 1 Defence Reform Bill — Report (First Day)

Aye: 167 Members of the House of Lords

No: 225 Members of the House of Lords

Aye: A-Z by last name


No: A-Z by last name


Amendment 3 not moved.