New Clause 2 - Code of conduct for relationship between defence contractors and MOD employees or service personnel

Defence Reform Bill – in a Public Bill Committee at 3:00 pm on 22nd October 2013.

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‘(1) A code of conduct shall be prepared by the Ministry of Defence governing contact between members of the armed forces and Ministry of Defence officials and employees or representatives of defence contractors.

(2) The code of conduct shall contain the following provisions—

(a) employees of the armed forces or the Ministry of Defence at or above the rank of Brigadier General or the equivalent Civil Service grade, shall be prohibited from undertaking paid employment with a defence contractor unless two years or more have elapsed since the termination of their contract with the armed forces or Ministry of Defence;

(b) the appointment of an individual as described in subsection (1) by a defence contractor shall be treated as a public appointment;

(c) individuals employed under the terms of subsection (a) shall not, whilst in the employment of a defence contractor, undertake any activity that brings them into contact with the Ministry of Defence;

(d) defence contractors shall publish on an annual basis a list of current employees whose appointment was under the terms of subsection (a);

(e) a register of gifts and hospitality shall be published quarterly by the Ministry of Defence;

(f) any gift or hospitality to an employee of the Ministry of Defence, member of the armed forces at or above the rank of Brigadier General, or Civil Service equivalent, or spouse or partner of such, of a value greater than £660 from a defence contractor must be placed on the register prepared under subsection (e).

(3) “Defence contractor” means a company, organisation or person whose main business is in the manufacturing or provision of equipment, works or services for defence purposes.’.— (Mr Jones.)

Brought up, and read the First time.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence)

I beg to move, That the clause be read a Second time.

Photo of Albert Owen Albert Owen Labour, Ynys Môn

With this it will be convenient to discuss new clause 3—Duty of Secretary of State to report increases in costs of defence contracts to Parliament —

‘(1) Where it is proposed that the total price payable for the provision of goods, works or services, procured from another person for defence purposes under a contract entered into by the Secretary of State, or a contractor acting on behalf of the Secretary of State under the provisions of section 1, should rise beyond that detailed in the original terms of the contract, the Secretary of State shall—

(a) lay before both Houses a report detailing the circumstances requiring the increased price,

(b) withhold approval of any adjustment of the total price for the contract until the report has been laid, and

(c) write to the chairs of the relevant parliamentary committees indicating that such a report has been laid.’.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence)

I shall speak to new clause 2; my hon. Friend the Member for Plymouth, Moor View will speak to new clause 3. As hon. Members will know, we are back to what some people have referred to as the boring bit of the Bill. [ Interruption. ] I am glad I have woken up the Government Back Benchers. Throughout our consideration of the first parts of the Bill, most were asleep, doing their Christmas card lists or getting their correspondence up to date. [ Interruption. ]

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence)

Having been in their position, I know that the role of Government Back Benchers on these Committees is to be seen and not heard.

New clause 2 addresses conflict of interest, which we touched on a week or so ago. There is a particular issue, to which my hon. Friend the Member for Plymouth, Moor View referred, about the revolving door—the transfer of people from the MOD and DE&S to defence contractors. There has been a lot of publicity about whether something could be put in place to prevent the practice or to ensure that the information that individuals have learned while they work in defence procurement is not transferred to a competitor. Some of the industry rightly has concerns about that.

There has been a lot of concern about the existing arrangements. It has put particular focus on the GoCo, which will have access to a lot of information that might be of use to competitors, who might gain from those individuals moving from the GoCo to work for another company. Although the Minister gave assurances about intellectual property and criminal acts if information was divulged or used, without new clause 2 there is not a great deal of assurance that we will protect intellectual property or avoid conflicts of interest.

Reference has been made to the Advisory Committee on Business Appointments, which most people think is a toothless tiger, although that is perhaps unfair to tigers. People have a period of grace before they move to an employment related to their former life, but that does not stop them moving during that period. Concern over that has been the subject of press speculation. Through a freedom of information request, The Guardian found that 3,500 former officials and senior military personnel have made the journey—it is, in some cases, a very profitable one—from the MOD to defence contractors since 1996. Between 2011 and 2012, 231 jobs went to former officials and senior military personnel, which was a rise of some 101 from the previous year.

The GoCo will be responsible for defence procurement. I have raised concerns about these individuals already and, if I were a company, I would be a bit more concerned. Stopping such a practice—for example, barring someone from working in a defence-related industry if they had worked for a GoCo—would be difficult without restraints on trade. That would be very difficult to do. The Minister needs to be clear that industry has raised the issue with me, my hon. Friend the Member for Plymouth, Moor View and others.

I support the introduction of the code of conduct and the Minister’s involvement with defence industries. I do not think that Ministers should be sealed in polythene and not allowed to talk to anybody from industry. That would be a naive approach and counter-productive. Clear codes are laid down for how the Minister and his officials conduct such relationships. They are important for the GoCo, which acts on behalf of the MOD. It is important that a similar code of conduct is in place and is monitored. If it is not, a charge could be levelled, possibly unfairly, at individuals who were providing hospitality or who were in contact with the GoCo, that they were trying to buy undue influence.

The code of conduct that covers Ministers and senior civil servants is open. Hospitality, gifts and suchlike have to be published, which is right. It is important that that type of approach is applied to the GoCo, because, in effect, the GoCo will be acting as an agent—the Minister used the word—on behalf of the MOD. In many cases, it will be acting with delegated powers from the MOD, so the same rules need to apply. If we are to have openness and transparency, the new clause is important. In its absence, there might be suspicion, and contractors might fear that their confidential information and the way in which the GoCo works and operates would put them at a commercial disadvantage.

Photo of Alison Seabeck Alison Seabeck Shadow Minister (Defence)

This is the last measure with which I am involved. We tabled new clause 3 partly as a response to concerns that arose when we were considering the early clauses in part 1. We believed that there was a need for tighter ministerial oversight and parliamentary scrutiny of projects as they progressed. The Minister attempted to reassure us and spoke about the scrutiny and oversight provided by the major projects report and the National Audit Office, and by the potential role of the governor sitting above the GoCo. Our intention therefore was to find out whether the Minister has considered producing, for example, a version of the US Nunn-McCurdy Act, whereby a programme is terminated if it goes beyond the original baseline—for example, if it goes over budget by more than 50%.

The new clause does not specify such an outcome. It merely ensures that a moratorium can be called until such time as the issues within a contract have been fully considered. That would, of course, include a cost that the taxpayer would have to meet. It enables the Secretary of State to withhold approval for adjustments to the total price for the contract.

In responding to questions about the GoCo and the Single Source Regulations Office, the Minister assured us that the type of oversight and parliamentary scrutiny that we sought was already possible. If my memory is correct, he also pointed out that, in a crisis, the time required to go through the process that we suggested could be damaging and costly. What the UK tends to do  and the US certainly does is pull contracts that exceed projected costs. Clearly, given the size of the US defence budget and range of defence equipment options, such a mechanism is much easier to apply in a US scenario than a UK one without significant loss of capability. We fully understand that, and that the UK does not have the luxury of some of those choices.

We do not intend to press the new clause to a vote. We rather wanted the opportunity to emphasise a couple of things: the need in future to monitor and scrutinise projects tightly while ensuring that the taxpayer receives value for money without excessive risks. There is something that all of us in this Committee come back to: making absolutely sure that our armed forces have the equipment they deserve to ensure that they can carry out the vital and dangerous work they do on our behalf, and that they have it in the time they need to use it. That is the logic behind having an opportunity to discuss the matter.

Photo of Philip Dunne Philip Dunne The Parliamentary Under-Secretary of State for Defence

I am grateful to the hon. Members for North Durham and for Plymouth, Moor View for their new clauses. I have slightly more to say about new clause 2 than new clause 3, but I will cover them both together.

I fully accept the critical importance of protecting the interests and integrity of decision making in the MOD and wider Government by maintaining the highest standards of propriety of those Crown servants within the MOD, including civilian staff as well as members of the armed forces, who interact with defence contractors. I strongly believe that the integrity and propriety of those Crown servants who may be in a position to influence decision making should be seen to be beyond reproach. However, I must resist the new clause as I believe that the issue is already effectively addressed and that it is, therefore, not necessary.

I must also resist new clause 2 because it would make the proposed GoCo option, which relies on the TUPE transfer of several thousand existing MOD civil servants into the GoCo operating company, unviable. As hon. Members know, under the GoCo option, former DE&S staff will become employees of the GoCo if we go down that route. As that provides services for defence purposes, they could be caught by the definition of defence contractor in the new clause. The new clause would therefore, first, prevent the transfer of DE&S staff for up to two years and, secondly, prevent them from having any contact with the MOD. These two constraints would clearly make the GoCo option by definition unworkable.

I am sure that the hon. Gentleman was not seeking to use this as a wrecking proposal, although it would have that effect. The code of conduct that the hon. Members wish to include seeks to address general concerns, expressed on Second Reading and during the oral evidence sessions, that some senior Government officials could be perceived to be in conflict, or have vested interests, when dealing with defence contractors in their day-to-day work.

Lord West of Spithead, in his evidence of 3 September, also referred to title 10 of the US code, the section of the code related to the armed forces of the United States. The code of conduct now being proposed, in our view, already exists within the MOD. It does so, not by name, but through two aspects of our governance rules. First, the Business Appointment Rules, or BAR. As the hon. Gentleman well knows, the MOD uses acronyms  at every opportunity. The BAR in this context means the Business Appointment Rules rather than any other kind of bar. Those rules govern situations whereby Crown servants wish to take up a relevant offer of employment within two years of leaving the MOD. The other set of rules governs gifts, reward and hospitality. Those cover situations where Crown servants are offered a gift or hospitality. Taken together, those two important rule sets are in place to set out the standards of conduct expected of Crown servants in the Ministry of Defence.

For civilian officials, both the business appointment rules and the gifts, reward and hospitality rules are contained within the civil service management code, which was issued under part 1 of the Constitutional Reform and Governance Act 2010. For military officials, the rules are contained within the Queen’s regulations for each of the services, and the provisions of the BAR have been in effect since July 1937.

The civil service code states that civil servants must not accept gifts, hospitality or benefits of any kind from a third party that might be seen to compromise their personal judgement or integrity. The Queen’s regulations lay down the conduct and procedure to be observed by service personnel on the acceptance of gifts, rewards and hospitality. In all cases, any offers of gifts or hospitality must be registered by the individual in receipt of the offer. The provisions of the BAR for both military and civilian officials differ depending on the seniority of the individual, with the most senior officials requiring permission from as high up as the Prime Minister to take up an appointment following the end of their service with the Ministry of Defence.

I would be interested to know whether the hon. Gentleman has had representations from any former service chiefs or three-star or above generals about the application of the rules preventing them from gaining employment after their service in the MOD, because in my short period in office I have had such representations.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence) 3:15 pm, 22nd October 2013

In practice, that shows that the rules do not work. The GoCo will be different: it will create a set of circumstances in which what happens now could be perceived as a conflict of interest.

Photo of Philip Dunne Philip Dunne The Parliamentary Under-Secretary of State for Defence

The hon. Gentleman has already conceded that there is a quite proper and appropriate two-way flow between industry and serving personnel and the Ministry of Defence, which facilitates effective dialogue and conduct of business between the procurement function and industry. I do not think there is a principled disagreement about the efficacy of having such a flow. We need to ensure propriety and proper conduct at the most senior levels.

I will come to the GoCo aspects in a moment, but I want first to rehearse the provisions of the business appointment rules. For the most senior officials in the civil service—at three-star level or their military equivalent—the rules require them to submit an application, which the Department must refer to the Advisory Committee on Business Appointments, or ACOBA, which will provide advice to the Prime Minister to enable a decision to be taken. Because of their role at the highest level of Government and their access to a  wide range of sensitive information, all permanent secretaries will be subject to a minimum waiting period of three months between leaving paid civil service employment and taking up an outside appointment or employment.

As a general principle, there is a two-year ban on civil servants at three-star and above lobbying Government—for example, communicating with a view to influencing a Government decision or policy in relation to their own interests. For civil servants at two-star level and their military equivalents, the rules require that an application be made to the permanent secretary, who is responsible for making a decision and providing a written recommendation to ACOBA. Applications from one-star level and below, and their military equivalents, are considered internally within the MOD. An application at these levels is required only if the individual’s circumstances mean that they have been subject to one or more specific aspects of work in their last two years of service. I will not go into those in detail; however, for the benefit of the Committee, they can be found on the Ministry of Defence website.

The number of applications made under the business appointment rules is relatively modest and has averaged about 200 a year. The hon. Gentleman referred to a larger number, but that is the average over the last five years across the one to four-star grades. As he said, in 2012-13 there were 258 applications, of which 172 were approved with conditions. The rest were approved unconditionally.

The rules on acceptance of gifts and hospitality set out that, even where acceptance is not unlawful, it can still be improper and, in serious cases, may lead to internal misconduct action being taken. This can be a particular risk in the Ministry of Defence, where many areas of departmental activity bring Crown servants into regular contact with outside organisations and, in particular, defence contractors, who may regard it as normal practice or social convention to offer hospitality and sometimes gifts.

It is impossible to set out rules to govern every conceivable circumstance in which a gift or hospitality might be offered and accepted. Much will depend on the nature of the relationship between the Department and the organisation, and the role of an individual Crown servant in that relationship. However, a number of clear principles are applied to all cases and are intended to enable Crown servants to act with propriety when deciding whether or not acceptance is appropriate. If there is any doubt, the individual is expected to consult their supervisors before accepting any gifts or hospitality. This consultation can be elevated as necessary in the Department if there is any unresolved doubt. I do not intend to go into the categories of gifts or hospitality unless hon. Members press me to do so, but Crown servants should have regard not simply to whether they feel themselves to have been influenced, but to the impression that their actions could have on others. Where acceptance of gifts may be acceptable, they must be deemed to be trivial in nature and non-contentious, and must not exceed £50 in value. Typically, gifts include things such as calendars, diaries or pens—perhaps for signing ceremonies and the like.

To answer the concern about the application of the rules to employees in a GoCo, we are considering what provisions might be required to align employment terms in a GoCo to the business appointment rules. As the BAR formed part of the terms and conditions of service of civilian staff currently in DE&S, and as such provisions would typically transfer to a new employer under the TUPE regulations, we anticipate that the rules will be taken across in the event of employees transferring into a GoCo.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence)

That is very interesting; it is the first I have heard that those types of codes of conduct are covered by TUPE, which usually involves people’s remuneration, work hours and things like that. Because it is not part of the contract of employment, I cannot see how a code of conduct can be part of the TUPE regulations.

Photo of Philip Dunne Philip Dunne The Parliamentary Under-Secretary of State for Defence

As I have said, we believe that they form part of the terms and conditions of service of the civilian staff, but if the hon. Gentleman continues to have doubt about this, I would be happy to write to him to clarify before Third Reading. In our view, new clause 2 has the effect of a wrecking amendment and is unnecessary. I encourage the hon. Gentleman not to press it.

Let me turn to new clause 3. It is a pleasure to see the hon. Member for Plymouth, Moor View, speaking for the Opposition, in Committee once again, having a final outing in our last sitting, which is entirely fitting. Her new clause, which she has clarified is a probing amendment, seeks to require the Secretary of State to withhold approval on any price change within a relevant contract until a detailed report has been laid before both Houses setting out why the increased price is required. The new clause also seeks to require the Secretary of State to write to the Chairs of the relevant parliamentary Committees—which I take to be the Defence Committee and the Public Accounts Committee—telling them that the report has been laid. I fully support the principle of being transparent with Parliament about the performance of the defence equipment programme, but since the SDSR 2010 and the commitment to publish an annual 10-year forward-looking equipment programme, this Government are being more transparent with Parliament than any previous Government.

I do not believe that new clause 3 is appropriate, for a number of reasons. First, it would significantly constrain the operational freedom of the Secretary of State and the Department. Secondly, the performance of the equipment programme is already regularly reported on, as I have said. Those reports are reviewed and critiqued by the National Audit Office, whose reports can be scrutinised by the Public Accounts Committee and by the Defence Committee, should it chose to do so. Thirdly, new clause 3 would raise significant practical issues. Under the hon. Lady’s proposal, every change of price within a contract managed by the GoCo would require a report to be laid before both Houses. That is clearly impractical, not least given the thousands of contracts managed by the GoCo. The new clause also provides no mechanism for approving contract price changes while Parliament is in recess. The hon. Lady made it clear that she tabled new clause 3 to raise her concerns with the Committee. I therefore hope she will not press it to a vote.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence)

I appreciate that we have rules, which the Minister outlined, on conflicts of interest. They are robust and are obviously there for very good reasons.  I agree with him: it is not just that something might be a conflict of interest; it is the implication that it might put someone in that position. We are moving to a new situation with the GoCo. We will have a private entity acting on behalf of the Government, as Government agents. The Minister obviously sees the need to ensure that the GoCo has similar rules to those that the MOD quite rightly has in place, so I do not understand why new clause 2 should be considered a wrecking amendment.

This is the first time I have heard that these arrangements will be covered by TUPE. I might be out of date, but my understanding is that TUPE usually covers terms of employment for contracts, but would not cover codes of conduct, which will not always apply in all situations. When the Minister writes to me about this, I will be interested to learn whether the codes of conduct will be covered under the TUPE arrangements, which I do not think they are.

It is important to give assurances to industry and others about these arrangements. As the Minister rightly says, we now have more transparency in these sorts of relationships, so I cannot see what is wrong with adopting new clause 2. Whether we like it or not, openness and transparency are important parts of public life these days, and people expect them. If those aspects are not covered by TUPE and the new clause is not passed today, no doubt he will come back with an amendment at a later stage.

Photo of Philip Dunne Philip Dunne The Parliamentary Under-Secretary of State for Defence

I would like to give the hon. Gentleman a little more reassurance. In the discussions we are having, in parallel to the passage of the Bill, about the GoCo competition, we have inserted an anti-poaching clause with respect to GoCo employees in the draft contract that has been provided to the consortia. Through the invitation to negotiate, we have also asked bidders to detail the arrangements that will be put in place to achieve the objectives of the BAR for the operating company work force, including for civil servants transferring under TUPE, new joiners and staff seconded, for example, from parent companies. However, I have committed to write to the hon. Gentleman about the TUPE point. I hope that will satisfy him; if not, he will have the opportunity to raise the issue again on Report.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence) 3:30 pm, 22nd October 2013

I am grateful to the Minister for that information. However, the Committee has been at a disadvantage in not being able to see those draft agreements. That has been part of the problem throughout our sittings, and certainly when it comes to the GoCo. A lot is still to be negotiated. This issue will be very important, and I do not think it is covered in the Bill. I do not think we can have just an assurance that it will somehow be added in the draft contract later; it needs to be in the Bill. I would therefore like to press new clause 2 to a vote.

Question put, That the clause be read a Second time.

The Committee divided: Ayes 6, Noes 9.

Division number 4 Decision Time — New Clause 2 - Code of conduct for relationship between defence contractors and MOD employees or service personnel

Aye: 6 MPs

No: 9 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.