Lord Coaker:

Moved by Lord Coaker

138: After Clause 98, insert the following new Clause—“Audit of Ministry of Defence procurement(1) Within one month of the passing of this Act, the Secretary of State must commission the National Audit Office to produce and publish a report setting out any instances of Ministry of Defence procurement in the period of 5 years ending with the day on which this Act is passed that have resulted in— (a) overspend on initially planned budgets,(b) assets being withdrawn or scrapped or prepaid services terminated,(c) a contract being cancelled,(d) a contract being extended beyond the initially agreed timescale, or(e) administrative errors which have had a negative financial impact.(2) The National Audit Office report must include recommendations on how better management of contracts can reduce the loss of public money.(3) Within three months of the publication of the report, the Secretary of State must report to Parliament on whether its recommendations have been accepted or rejected, with reasoning in either case.(4) The Secretary of State must commission the National Audit Office to conduct a similar review annually.”Member’s explanatory statementThis Amendment would require an annual audit of Ministry of Defence procurement to be commissioned by the Secretary of State.

My Lords, I say from the outset that this is a probing Amendment to give us the opportunity once again to talk about defence equipment, and I am pleased to see the noble Baroness, Lady Goldie, here. I was minded when I saw her rushing in to do what somebody did to me once. They moved the amendment formally so I had to start responding when I did not have the breath to do it, but I will not do that, partly because I respect her too much.

I am grateful for the support for the amendment from my noble friend Lady Hayman and the noble Baroness, Lady Smith of Newnham. As I say, it is a probing amendment to once again ask about defence procurement. We all have an interest in ensuring that defence equipment is procured efficiently and effectively, because that contributes to the defence of our nation, which is important to each and every one of us.

In particular, I just wanted to ask the noble Baroness a couple of general points and then a couple of specifics. We could have a debate for hours on this, but I do not think that is appropriate at the moment, given that it is a probing amendment. She will know that, in November 2021, the Public Accounts Committee published a report which had significant challenges for the Government. It talked about delays in the Government’s defence equipment procurement programme and a net delay of 21 years across the programme. The committee’s report also said that:

“the Department failed to assure us it is taking these matters sufficiently seriously”.

They are the Public Accounts Committee’s words, not mine. The committee called for more transparency and openness, and said that an urgent rethink was needed and that there was waste running into billions of pounds.

As a starting point, can the noble Baroness update us all on the progress the Government have made in the year since the Public Accounts Committee’s report into defence equipment spending in the other place in November 2021 and where we are now with that? That is particularly opportune because yesterday the Government published the Defence Equipment Plan 2022 to 2032, which I read with interest. While staying on the generalities, I ask: what did the Ministry of Defence mean when it said in the plan’s executive summary:

“The publication of this report comes at a decisive point for Defence and a period of rising inflation for the country. Although these pressures will have an eventual and significant effect on Defence spending, their full likely impact is not contained in this report”?

The report starts by saying that it does not include the impact of the current inflation level, even while saying that it will have a decisive impact. Frankly, I found that quite bemusing. I would be grateful for clarification from the Minister on what inflation figure was used. If I have read the report right, it was the inflation figure for March 2022. I might be wrong, so I stand to be corrected on that. We know that the current inflation figure is 11.1% and it is not clear whether that is going to go up or down—we hope that it will go down—but how can anyone publish a defence equipment plan, laying out the cost of equipment they hope to purchase, if they do not know what the monetary impact is going to be but they state that it will have a decisive impact? Clarity on that would be extremely helpful for your Lordships’ House.

As I say, those are some of the generalities that I wanted to raise. The whole point of an audit, as we have laid out, is to try to get some clarity and understanding of what is going on. The point of my amendment is that it looks at the next five years. The equipment plan looks at the next 10 years, so the Government’s projected assumptions about inflation are pretty important regarding what they can and cannot afford during that time.

Since we are looking into the future, what is the future of Ajax? The Ajax programme began in March 2010, intended to transform the army’s surveillance and reconnaissance capability. To say it has gone badly wrong does not really do it justice. The department has a £5.5 billion fixed-price contract with General Dynamics, which was supposed to be for an initial 589 Ajax armoured vehicles. Those Ajaxes were supposed to come into service in 2017. They subsequently missed the revised target of 2021. By December 2021, the department had paid General Dynamics £3.2 billion but had received only 26 out of the 589 vehicles, none of which it can use on the battlefield, so the programme is in absolute turmoil. What is the current situation, and what now is the projection for the numbers of Ajaxes that are finally going to be operational? When will that happen? Given that the Government have put a ceiling on the project of £5.5 billion and have already spent £3.5 billion or so but received only 29 vehicles, what is the future of that programme? What is happening?

Will the Minister take this opportunity to update the Chamber on the important question of the current situation with regard to the “Prince of Wales” aircraft carrier? We are all very proud of our two aircraft carriers and want them to be successful. The “Queen Elizabeth” is performing majestically and fantastically for us and we are very proud of that, but obviously there have been problems with the “Prince of Wales”, which has only recently been completed. What is the projection for when it will be fixed and engineered back? What will the cost of that be, and is it factored into the various budgets?

You can see the difficulty with equipment; just the other day, the Defence Secretary said that the Royal Navy’s new submarine-hunting frigate would be hit by a year’s delay costing £233 million. There are numerous examples that we could look at beyond the couple I have used but, on the general point of my amendment, I want to know from the Minister where the Government are on their response to the Public Accounts Committee report from the other place, published a year ago, and what on earth that sentence in the executive summary of the equipment plan for 2022 to 2032 means, in which the Government say, astonishingly, that inflation is not costed in even though it will have a decisive impact on that plan. We would like some answers to that.

This is said from a position of wanting the defence equipment plan to work and deliver all the requirements of our fantastic, brilliant Armed Forces. To do that, we need certainty. I know the Minister will say, quite rightly, that there are fantastic examples of equipment that has been produced for our Armed Forces. That is true, but budgets continually overrun by billions of pounds and delays happen. Most importantly, have the Government responded—and if not, how will they respond—to the Public Accounts Committee report from a year ago?

My Lords, I had to be absent for two and a half weeks in late October and early November and my noble friend Lady Smith of Newnham kindly and generously substituted for me. I now find myself in the same position, as unfortunately she is unwell.

Listening to the noble Lord, Lord Coaker, I remembered that I used to work on defence procurement when I was at Chatham House in the 1980s. It is depressing how few of the issues have fundamentally changed since then. It is part of the culture of our Armed Forces, and one or two former members of the Armed Forces who sit on the Labour Benches, that they like their toys to be of the best US complexity standard and as big and expensive as possible, and they want to change the specification several times while they are being developed. That is how one ends up with two very large aircraft carriers that we are not at all sure we ever wanted.

I sympathise with the MoD on the difficulties of procurement, but I suggest to the Minister that, as we absorb the very considerable implications of the Ukraine conflict for the sort of kit one needs and the sort of wars we may be fighting, it would be very helpful if the MoD took into account those in both Houses who are interested and briefed us as it went along. We are now discovering that a lot of cheap weapons, sometimes commercially acquired, can be as effective—or sometimes more effective—than very expensive ones. The last time I spoke to a group of former members of the Armed Forces, I asked a former colonel of an armoured regiment what he thought about the future of tank warfare. He replied: “You’d never get me inside one of those things again”. Our assumptions about the nature of warfare are changing.

This raises large questions for the MoD. We know that there are always tremendous problems with how much you need in reserve, and we are now discovering that we are running short of resupplies for Ukraine. I discovered the other year that the Liberal Government of 1895 fell on the issue of inadequate supplies of cordite for the Armed Forces, so here again, things are not entirely new. I see that the Clerk of the Parliaments remembers that occasion very well.

Members of both Houses all support the greatest possible transparency and recognise that we need to change the culture in all three armed services from one that says, “We have to have equipment that is at least as complex and of at least as high a standard as that of the US” to one that says, “For the many things we need, more things that are slightly less complex and a hell of a lot cheaper would probably be better”. So I ask for more transparency—that is where the audit comes from. We are actively concerned about supporting our Armed Forces, but we recognise that the implications of what we have seen between Ukraine and Russia give rise to large questions about the future balance of defence procurement that we have to address.

My Lords, the noble Lord, Lord Wallace of Saltaire, is right to remind us not just of events in Victorian Britain but of what is happening at the moment and the impact that events in Ukraine and elsewhere will have on our procurement programmes.

I serve on your Lordships’ International Relations and Defence Committee. As the noble Baroness, Lady Goldie—it is wonderful to see her in her place—knows, throughout the whole of this year we have been conducting an inquiry into procurement and defence priorities, which the noble Lord, Lord Wallace, touched on. We began it before the second invasion of Ukraine in February. From my discussions with the noble Lord, Lord Coaker, who pressed this issue in Committee, I know how important this is, for all the reasons he described. He has a great sense of patriotism and cares for our Armed Forces, and I strongly associate myself with him and the desire for a probing Amendment to test some of these questions.

One reason why I hope the noble Baroness, Lady Goldie, will be able to reply in terms to the noble Lord, Lord Coaker, on Ajax especially, is that the noble Baroness, Lady Anelay, who is chair of our Select Committee, was here during his speech—she was unable to stay—and said that I can tell the House that she strongly agrees with the questions he put. She hopes that the noble Baroness will be able to answer them because they will be part of the terms of our committee’s report, which we have to complete before the House rises for the Christmas Recess at the end of December. So it is important that, if the noble Baroness is not able to answer those probing questions this evening, we are given answers in due course.

One of the witnesses to the Select Committee inquiry was Professor John Louth, who was the director of defence, industries and society research at RUSI from 2011 to 2019. When we asked him directly about the way in which we should go about defence procurement, I asked him specifically about the Bill and whether it would be welcome. He said:

“I have tried to read as much of this as possible … It is hard to identify the end state that the Government are looking for”.

He said that there are

“lines and lines of rhetoric and legalistic reform”,

some of which is incomprehensible even for those of us who are academics.

I asked him specifically about Ajax, which the noble Lord, Lord Coaker, has been raising, and he replied that it has been a “disaster”. As we have heard, it was intended to be a state-of-the-art reconnaissance vehicle for the army, and it has cost a staggering £3.2 billion to date, yet so far not a single deployable vehicle has been delivered—not one. It was of course supposed to enter service in 2017, but it has been subject to what the Commons committee called a “litany of failures”, including noise and vibration problems that injured the soldiers testing the vehicles. Can the Minister tell us whether those safety issues have been resolved, or whether they are ever likely to be?

The noble Lord, Lord Coaker, reminded us that the House of Lords Select Committee said the programme had been “flawed from the outset” and also that it was illustrative of a deeper failing, commenting that the Ministry of Defence

“once again made fundamental mistakes in its planning and management of a major defence programme.”

Pulling no punches, the Public Accounts Committee accused the department of failing to deliver vehicles which the Armed Forces need

“to better protect the nation and to meet our NATO commitments”.

In the current situation, with one eye eastwards to Ukraine, that is a very serious statement by a senior committee of Parliament—and this Bill, of course, is a Bill that will go down to the other place. It will go as a pristine Bill from the House of Lords, but the other place will be able to amend it, and I have no doubt that people from the Public Accounts Committee will want the answers that the noble Lord has gently been asking for this evening.

I will end by quoting Meg Hillier, who chaired the committee inquiry. She said:

“Enough is enough—the MoD must fix or fail this programme, before more risk to our national security and more billions of taxpayers’ money is wasted. These repeated failures … are putting strain on older capabilities which are overdue for replacement and are directly threatening the safety of our service people and their ability to protect the nation and meet NATO commitments.”

That is good enough reason alone, surely, for the Minister to give the House a comprehensive reply.

My Lords, I first thank noble Lords for their contributions. I understand fully that the proposed Amendment is well intended, and I accept it in that spirit. I think it has certain implicit difficulties, which I shall move on to. I would never object to the Opposition Benches holding the Government’s feet to the fire—that is what the Opposition are there to do—but I hope they will be patient with me as I seek to explain why the precise terms of the amendment confront the MoD with difficulty.

The proposed amendment would require the Ministry of Defence to commission and publish a report from the National Audit Office, setting out instances of procurement overspend, withdrawal or scrapping of assets, termination of prepaid services, cancellations or extensions of contracts, or administrative errors with negative financial impacts. The reason the MoD rejects the amendment is not because it is not in sympathy with what I have identified as a well-intended sentiment expressed by the noble Lord, Lord Coaker, but quite simply because existing processes already ensure robust scrutiny and accountability of Ministry of Defence procurements.

Before I move on to that more detailed exposition, let me deal with a very specific point the noble Lord raised about the defence equipment plan which was published yesterday. He is more ahead than I am because I have been preparing for this. I have referred it to my officials, and I am told that it is difficult to calculate an accurate figure of inflation at the moment, due to volatility. That is an inadequate response to give the noble Lord from the Dispatch Box, so I offer to write to him. We will do further research in the department, and I shall endeavour to expand on what these particular difficulties are.

That is totally acceptable, and I am very appreciative of it. The reason I asked was because the National Audit Office, commenting on the 2022-23 equipment plan, said it was already out of date because of inflation, Ukraine, the economic situation, et cetera. So I very much appreciate the offer from the noble Baroness to write and put that in context for us. I think it would be helpful if that was put in the Library for other Members as well.

I join the noble Lord in welcoming that and also ask that the Minister includes currency because, while inflation is important, currency is actually more important in some cases. It is absolutely clear that a lot of these purchases are made in dollars and the dollar/pound rate will determine quite substantially the rising costs of equipment.

I hear both noble Lords. To put a little context around this, the MoD has not been sitting in some splendid ivory tower in isolation as volatile economic circumstances swirled around us. Actually, we have built protective measures into many of our contracts to deal with inflationary pressures—or, indeed, to deal with the currency fluctuations mentioned by the noble Lord, Lord Fox. I appreciate that more detail is sought and I shall certainly look at that, with my officials, and endeavour to return to both noble Lords with some more information.

I was going to explain in more detail what we already do and how the National Audit Office already plays a role in all this. The National Audit Office is independent—we should remember that—and it already conducts a yearly audit on the defence equipment plan and undertakes regular audits of defence programmes. Further scrutiny of the performance of defence programmes is undertaken by the Infrastructure and Projects Authority, which tracks the progress of projects currently in the government major projects portfolio, not just that of the MoD. The details of these are published in its annual report. As an independent statutory body, the National Audit Office decides, independently of government, where to focus its resources and determines what projects and public bodies it audits and when.

It is important to emphasise that the Government do not direct the NAO; nor should we, because an essential feature of the importance and value of the NAO is that independence. Although it may not intend to do so, I argue that the Amendment would interfere with that statutory independence. In addition, it would force the NAO to use its limited resources on a specific examination each year, irrespective of changing priorities: something might be significant one year and of far less concern the following year. It might even not reflect the continuing value of such an examination to Parliament: this is where we have to be very careful.

To reassure noble Lords, as I indicated, the Ministry of Defence continues to take steps to control the rise in the price of defence goods and services over time, including through improving the communication of longer-term priorities and requirements, including, as noble Lords will be aware, through the publication of pipelines. That is an extremely important development and signals likely demand to industry far better. It lets industry reflect on preparedness, instead of what was before probably a rather stop-start process, with industry asking, “Do you need anything?” and us suddenly announcing, “Yes, we do,” and everybody trying to create the thing from new.

The Ministry of Defence is utilising a new approach to industrial strategy. This strengthens supply chains and is driving pace and agility into the acquisition system through a range of transformation initiatives. The department has implemented steps to estimate project costs more accurately, including improving our risk forecasts through the use of reference class forecasts; that is, trying to use procurement as it happens, to inform us—what can be learned from the process? We have risk-costing pilots and we use the analysis of systematic, strategic or operational problems to inform us how the contract is proceeding. The MoD is also driving evaluation into programmes through the use of monitoring and evaluation frameworks and creating a process to capture and share lessons learned.

An important area, perhaps not widely understood, is that the MoD, like everyone else, can be hit by the quality and quantity of skills. That may be a significant impediment to us. Improvements are being delivered through the improved provision of training, initiatives to recruit and retain staff, and audits to identify and fill skills gaps.

The noble Lord, Lord Wallace of Saltaire, said that not much has changed. I think he started with the 1980s, then we seemed to regress further, into the Victorian age, when I am not sure we would recognise very much of what our procurement contracts are delivering. I respectfully disagree with him because, in addition to what I have previously mentioned, including the investment appraisal process, we have made other big changes. For example, all category A procurements, which are valued at £400 million or above, go through an extensive internal MoD process before they even get to the Cabinet Office, the Treasury or the Minister of Defence for approval.

Costs are now independently assured by the cost assurance and analysis team, tender and contract documentation is independently assured through the progressive assurance team, and direct award contracts are reviewed and monitored by the single-source adviser team. If that sounds like just verbiage, let me say that behind that are highly trained expert people who are there to identify the shoals, the reefs and the rocks, bring them to our attention, and make sure that we are not inadvertently drawn into areas of contract weakness where in the past we might very well have gone.

We are content that there are sufficient checks and balances in place to ensure that we achieve best value for money, learning from previous procurements. There are some good examples, and I was very struck by visiting Babcock at Rosyth, where it is building a Type 31 frigate. That really proceeded on a new basis of approach—it was born out of the national shipbuilding strategy. That programme was established in 2017, and following competition a contract was awarded to Babcock in November 2019 for the design and build of the five ships; it is currently under way, with the first ship scheduled for float-off in 2023. With barely three years passed since contract-award, the Type 31 build at Rosyth is well under way, with the first grand block now assembled in the Venturer assembly hall. The build programme is set to meet its deadlines of delivering all five ships off-contract by the end of 2028, and the build contract is on course to deliver the five ships at an average cost of £250 million per ship.

I use that as an example because it seems to me, having seen it at first hand, a very modern illustration of where we have moved to. When I say to the noble Lord, Lord Wallace of Saltaire, that I do not agree with his characterisation, I also try to illustrate that argument by pointing out that there are different practices at play, informed—I fully admit—by a number of sources like the national shipbuilding strategy, which was an innovative change of direction for how we procure ships within the UK. But we have also had a very good example with the Poseidon aircraft programme operating out of RAF Lossiemouth in the north of Scotland on the Moray coast. It is an absolutely fantastic facility. That fleet comprises nine aircraft, which were all achieved on time, within budget, and to a challenging timeline.

It is very easy to be sceptical, and I fully understand why your Lordships rightly have been sceptical of some pretty poor experiences in the past, but all that I am pointing out is that we have moved on to a better way of doing things, and I hope that your Lordships understand from what I have been explaining and describing that there is a far better structure within the MoD to deal with these complex procurement contracts. These defence contracts are often complex, they are required quite often at speed to meet emerging threats, and are often needed to provide much-needed support to our Armed Forces, to ensure that we maintain operational advantage and to reduce the risk to our nation.

The noble Lords, Lord Coaker, Lord Wallace of Saltaire, and Lord Alton, all raised the issue of Ajax, and I think I have said before from this Dispatch Box that it was certainly not one of our proudest moments. Intrinsically, it is actually a very good vehicle, and it will provide an important capability. Following agreement from the Ajax safety panel, work has led to resuming the user-validation trials which were paused earlier this year. Results from these trials are being analysed to ascertain whether it is possible to deliver a safe system of work under which to conduct reliability-growth trails. Your Lordships are aware that there were issues with vibration and hearing, and the one thing that we were very clear about was that we were not going to put people at risk; my former colleague as Minister for Defence Procurement, Jeremy Quin, was absolutely insistent. That is why, despite the embarrassment, we paused what was happening until we had a better understanding of what was going wrong; but I make it clear that the MoD will not accept a vehicle until it can be used safely for its intended purpose.

Your Lordships will be aware that Clive Sheldon KC is leading the Ajax lessons learned review, which is looking at ways in which the Ministry of Defence can best deliver major contracts more effectively in future. That is an important review and we await his analysis, conclusions and recommendations, but I emphasise that any delay to Ajax will not affect our commitments to NATO. That is an important point to observe.

The noble Lord, Lord Coaker, asked about the “Prince of Wales” carrier. Rosyth on the Forth is where good things happen: as well as building the Type 31, that is where the Prince of Wales carrier is currently reposing. She is a state-of-the-art aircraft carrier. She has already proved her capabilities in a number of exercises, but there was an issue concerning the propulsion shaft and investigations are now under way. She is a huge vessel, and it was necessary to take her into dock to have the facilities properly to examine what was going wrong. Timelines for the repair of the shaft are being investigated and further updates will be provided in due course. We want her to return to operations as soon as possible. My understanding is that we have brought forward some routine maintenance anyway, so that can be attended to while she is at Rosyth. I have no more specific information at this time, but I expect we will get a further report when more is known about the underlying condition and how long it will take to rectify.

The noble Lord, Lord Coaker, raised the Type 26, which is a first-class ship. I have visited the programme in the yard at Govan being operated by British Aerospace. It is a fantastic piece of maritime equipment and it will be pivotal for the Royal Navy. It is proceeding very well. We have just awarded the batch 22 contract to the yard because we were absolutely satisfied about the professionalism, commitment and effectiveness of what British Aerospace was doing with the first batch. It is true that there has been a delay, but there are two reasons for that. Covid was one factor; it has created delays for our defence industry partners and their supply chain. I understand that there were also issues with locating the necessary corps of skills, but it now seems well under control and we hope that the new timeline can be adhered to. British Aerospace is certainly very keen to demonstrate that and to commit to making it happen.

The noble Lord, Lord Wallace of Saltaire, raised the issue of levels of munitions. He is quite right that particular demands have fallen on that area due to the conflict in Ukraine. Those of us who listened to the extraordinary, courageous address by Madam Zelenska yesterday—I was among those privileged to be there—could not help but feel huge admiration for her, her husband and the people of Ukraine, as well as a sense of pride that we have been able to come to their assistance. We have been able not just to support them in what they have been looking for but, I hope, to give them the reassurance of optimism and hope for the future; Madam Zelenska referred to that. I reassure your Lordships that, in our supply of anything we have provided to the Ukrainian armed forces, we have never compromised our own levels of stocks in relation to meeting our national security obligations.

The noble Lord, Lord Alton, referred to someone—that sounds rather disrespectful; it was someone very eminent—who used to be in RUSI who had certain challenges with the Bill. As a former lawyer, I would say in response that I think the Bill is a welcome clarification and consolidation of procurement law in the United Kingdom. For the MoD, there has been carefully researched tailoring of the Bill to meet the unique requirements of defence. Our industry partners have been positive, so I think the Bill has the potential to introduce far greater clarity to industry—both primes and smaller contractors—and give them a much clearer sense of how they engage, what they can do and what the rules are. That is absolutely to be commended.

In conclusion, I am under no illusions about the challenges the MoD faces in relation to large-scale procurement. We recognise these challenges, and that is why we continue constantly to explore additional actions to mitigate the effects of cost escalation and cost growth. I hope I have been able to explain in sufficient detail what we do already—particularly the very specific character of the National Audit Office, which is independent of government—to enable your Lordships to understand why the MoD is unable to accept this amendment, while it does identify with the sentiment with which it was put forward. I ask the noble Lord, Lord Coaker, to withdraw the amendment.

I thank the noble Baroness for her reply and her offer of a letter. I stress how important that letter is, given the quote I am about to read, which summarises the National Audit Office’s assessment of the equipment plan that the Government published:

“The equipment plan is based on data submitted by the end of March this year and does not take account of the impact of exchange rate changes, rampant inflation, fuel costs and the Russian invasion of the Ukraine.”

It would be helpful to your Lordships’ House if the noble Baroness would respond in a letter and put it in the Library. It would be very useful to hear what the Government are saying about the National Audit Office’s comments.

I know that there are problems with Ajax; we look forward to continuing discussions on that. We have raised a number of other difficulties. I think all noble Lords here recognised that there are significant successes alongside that and we should recognise those—I certainly do. We all want our Armed Forces to succeed. The noble Baroness is quite right to remind us of the support we have given to Ukraine and the bravery of the Ukrainian people. We are right to recognise that once again this evening. With those brief comments, I beg leave to withdraw the Amendment.

Amendment 138 withdrawn.

Clause 99: Procurement investigations