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Defence Equipment and Support

Volume 548: debated on Tuesday 17 July 2012

Before I call Alison Seabeck to ask the urgent question, it may be for the convenience of the House if I make it clear from the outset that I intend to conclude supplementary questioning no later than half an hour after the start of the UQ. Brevity by all concerned should enable all those who wish to contribute to do so.

(Urgent Question): To ask the Secretary of State to make a statement on the future of Defence Equipment and Support.

A key element in the transformation process under way in the Ministry of Defence is that of its equipment and support activities through the matériel strategy. Reforming the acquisition system to drive better value from the defence budget is a core element of the process. This will require changes to Defence Equipment and Support to ensure that the organisation has the structures, management and skills it needs to provide the right equipment to our armed forces at the right time and at the right cost. Change is essential to tackle the legacy problems in defence acquisition that have historically led to cost and schedule overruns and have resisted previous attempts at reform.

The current system does not help or support DE&S properly, and it is not delivering value for money for the taxpayer. Bernard Gray’s analysis reveals the following root causes: first, an historically overheated equipment programme in which far more projects were planned than could be paid for; secondly, a weak interface between DE&S and the wider Ministry of Defence, with poor discipline and change control between those setting requirements for equipment and those delivering the programmes; and, thirdly, insufficient levels of business capability at DE&S for the scale and complexity of the portfolio it is asked to deliver. The result of these combined issues has been significant additional costs in the defence budget in the order of hundreds of millions of pounds each year.

Earlier this year, MOD officials were asked to focus their efforts on considering the comparative benefits that could be derived from changing DE&S into an Executive non-departmental public body with a strategic partner from the private sector or a Government-owned, contractor-operated entity. The work done to date suggests that the strategic case for the GOCO option is stronger than that for the ENDPB option. Further value-for-money work is under way to confirm this assessment. In the meantime, as resources and commercial appetite constrain our ability to pursue these two options simultaneously to the next stage, we have decided that the Department should focus its effort on further developing and testing the GOCO option.

The work to determine value for money between the options will take place over the next few months. In parallel, we will begin to develop a commercial strategy, engaging with industry to hone our requirement. This work will support decisions later this year on whether to proceed with the GOCO option and whether to launch a competition for a private sector management company to run the organisation. Provided that the further work demonstrates that the value-for-money case for GOCO over ENDPB is conclusive, this will be followed by an investment appraisal that will test the GOCO against a public sector comparator. Ultimately, this would be followed by a decision on whether to proceed.

Let me be clear that there is massive consensus across this House that defence procurement must be tackled to ensure that some of the issues that plagued successive Governments are not repeated. We understand the budgetary challenges faced by the MOD and agree that procurement reform is essential to ensure financial sustainability.

It was therefore a huge surprise when yesterday the Secretary of State revealed in Defence questions that a decision had been made on the future of DE&S, but that no oral statement was planned and, indeed, that it was to be slipped out on the last day of Parliament. It was a bigger surprise, therefore, to read in the written statement that in their third year of government, no decision has yet been made by Ministers. The delay is as worrying as it is inexplicable. With the Gray review, the previous Government began the process of reform. It is now unclear when it will be completed. Will the Minister comment on the timing and confirm that primary legislation will be required for a GOCO?

The Government prefer the Government-owned, contractor-operated model, but it is unclear why. Will the Minister explain precisely why a GOCO is preferable to an NDPB? Are his Treasury colleagues content that the GOCO model offers value for money? Will he make a commitment to publish the full reasoning for the rejection of other models?

We fear that privatisation could weaken the public accountability and transparency of multi-billion-pound defence decision making. How would a GOCO be held publicly accountable? Who would be responsible for ensuring that contracts were delivered to time and to cost? We have seen recently with G4S that outsourcing does not guarantee efficiency or effectiveness, and can increase risk. Indeed, even with the London Organising Committee of the Olympic Games and Paralympic Games model, problems have arisen because Ministers have been distanced from the decision-making process and the lines of responsibility have been blurred. Such issues would be unacceptable when dealing with our armed forces.

Will the Minister say what will happen to existing contracts under the GOCO model? Crucially, those include the nuclear deterrent. Finally, what will the military’s role be in procurement under these plans? What guarantee can he give to the 20,000 people who are employed by DE&S that their jobs are not under threat?

The future of DE&S is not only about tens of thousands of highly skilled jobs in our defence industry, but, crucially, about the security of our nation. Getting it wrong would put lives at risk. It is vital that Parliament has a full opportunity to scrutinise these decisions.

May I correct the hon. Lady’s first proposition? It is clear that no decision has been made. A study is being carried out, which involves value-for-money work. If, when that appraisal is completed, we take this option forward, that is the point at which the decision will be made. Only when the model had been worked up and thoroughly tested would we finally take the decision to go ahead. Of course, we would come back to the House at that point.

The hon. Lady suggested that we had slipped this announcement out. I would say that the contrary is true. If the House had not been about to go into several weeks of recess, we would not necessarily have made a statement yet. We have done so to give the House the greatest possible transparency about what is going on and to send the clearest possible signal to the potential commercial partners that we are serious about this matter and are taking it forward. I stress that the decision about timings will be taken towards the end of this year. The commercial partner would be sought in a competition during the course of next year and a decision on whether to go ahead would be taken early in 2014.

The hon. Lady asked whether this model would include the nuclear component of defence. I remind her that the Atomic Weapons Establishment at Aldermaston is a Government-owned, contractor-operated organisation, and that it works extremely well. The last Labour Government and previous Governments have made extensive use of the private sector in providing critical elements of our defence and other public services. I see no reason to believe that it would be any less capable of doing so in this area.

The GOCO option has looked better in the early explorations because if we stuck with an ENDPB, the work force and the management would remain in the public sector, and the greatest possible private sector involvement would be the use of a consultant. If we go for the GOCO option, the entity will have all the freedoms of a private sector operator: it will recruit people on private sector terms and conditions, and will have an incentive to make the thing work in a way that an ENDPB would not.

Does my hon. Friend agree that this is a matter of such crucial importance that it is important that it should not become a party political plaything, and if it can be done in such a way as to attract the support of all sides of the House, the benefits that will flow from these changes will come sooner and they will flow much more copiously, and we will reach the sunlit uplands of wonderful defence procurement?

I strongly agree with my right hon. Friend. It is worth recalling that the previous Government asked Bernard Gray, a former Labour special adviser at the Ministry of Defence, to conduct his study of defence procurement. He came forward with a compelling and, to some extent, damning report. Central among his recommendations was the proposition that there should be a GOCO to run DE&S in the future.

We have now recruited Bernard Gray to be the Chief of Defence Matériel and given him the opportunity to go into further depth, and it has become increasingly clear that he was absolutely right. Of course these issues will have to be debated, and I have explained that the timelines are still quite long. No decisions have yet been taken, and proper value-for-money studies will continue.

To answer a question that the hon. Member for Plymouth, Moor View (Alison Seabeck) asked, those studies will be made available for everybody to have a look at. This does not need to be a political football, and I hope it does not become one.

Where will these proposals leave the complex weapons contract, which has delivered such effective outcomes in Libya and provided top-class jobs and technology throughout the country, particularly in north-west England?

As far as I am concerned, the proposals will have no impact on that. The specific contracts to provide particular services and products will be unaffected by the changes. They will enable us to secure better value for money in future when we make further contracts on a variety of defence procurement issues.

Urgent operational requirement contracts have played an important part in recent years, but unlike with planned procurement the through-life costs are often not included in the initial costs. How will the through-life costs be accommodated in an overheated defence budget?

Decisions on whether any of the procurements that we made under the UOR process should be brought into the core defence programme will have to be taken individually in respect of each procurement. Some will be brought into the core programme, and at that point a full analysis of through-life costs will have to be made. Others, despite having performed well in theatre, will not be brought into the long-term defence programme. The type of scrutiny that my hon. Friend seeks will take place at that point.

How will this decision, or lack of decision, affect existing contracts such as that for the A400M, on which many UK aerospace jobs rely?

It will have no impact on existing contracts. It is the means by which we will secure better value for money in forming future contracts.

Can the Minister explain in a practical way how a complex and expensive equipment programme such as the future carriers would have been better carried out under the new arrangements? For example, somewhere along the line the idea that the carriers should be easily convertible to take catapults was left out of the design. Would that situation be improved by the new arrangements?

It is probably common ground throughout the House that defence procurement has not been an exemplar of success for a good many years. One reason for that is that despite the good work of good people working for DE&S, they do not have available to them the full range of skill sets that they need to negotiate on equal terms with some of the more complex providers. Granting DE&S the private sector freedoms I have described will enable it to take on board the necessary skill sets to ensure that in future negotiations and future project management there is a better match between those securing value for the taxpayer and good products for the armed forces and the private sector providers of complex programmes. That will be a marked improvement on how things have been in the past.

Will the study that the Minister mentioned consider the procurement and purchasing of equipment alongside our allies and other countries, which could reduce costs?

It is certainly true that a lot of our procurement is done in a cohort with our allies, and as time goes forward I expect that to be increasingly the case. Having a Government defence equipment and support body with the freedom to operate in a quasi-private sector model will give us the best possible latitude to deal with a variety of allies that have differing models of defence arrangements.

One of our allies is Australia. I urge the Minister to look to that country, where a Government-owned contractor-operated organisation seems to work successfully. Will he give me a guarantee that this Government, unlike the previous one, who gave away submarine engine orders to Germany, will ensure that contracts are let to British industry?

Of course, competition laws dictate the ability of any Government to grant contracts to onshore suppliers. Our first and foremost consideration is to equip the armed forces with what they need. Our second consideration is to ensure value for the taxpayer. If, having ticked both those boxes, it is possible to ensure a healthy and thriving defence industry in the UK, so much the better. We like to give contracts to British suppliers when possible, but there are competition laws and our hands are tied.

The Minister proposes a procurement model that allows the Government to buy off the shelf from any company, whether or not it is British. He will be aware that BAE lost the Typhoon contract and that a French company has preferred-bidder status. If we are not prepared to give preferred-bidder status to British companies, why should other countries do so?

Clearly, it would be foolish not to consider buying things off the shelf that meet the requirements of the British armed forces. However, I repeat that clear competition laws determine the circumstances in which we can award preferred-bidder status. In many cases, we are unable to do so.

Can the Minister career-plan specialist officers who go into defence procurement, so that they can spend longer than two years—three or four years, perhaps—doing the job to improve the efficiency of the product?

My hon. Friend makes a good point. Even under the proposed model, we will continue to have quite a lot of military personnel inside DE&S, which it needs to give it insight into the user requirement. I agree with my hon. Friend that short rotations have not served DE&S well. It would be to the benefit of both the individuals and the organisation if postings were for longer periods.

Thousands of jobs in Edinburgh rely on companies such as SELEX Galileo. What relationship will the new body have with such private sector companies?

The new body will have the same relationship as the existing one with suppliers of such products. The new body will contain a greater degree of private sector expertise, so it might be able to drive a harder bargain.

We need to make the best use of the defence budget and give our armed forces the tools they need to do the job, but we must also protect sovereign capability and have a strategy on where we invest our research and development budgets. Does the Minister agree that deciding how we organise those two things is too important to be left to dogma?

I agree with my hon. Friend that we need to maintain sovereign capabilities. I referred a moment ago to competition law, but when there are specific exemptions that enable us to protect national sovereignty for reasons of national security, we will take them. She is right on the research and technology budgets. They will remain an important part of our work. We cannot leave it entirely to the private sector to undertake primary research. It is necessary for the state to stimulate it.

The Minister may know that I was present on 2 July at the royal opening of the new £75 million BAE System munitions factory in my constituency. It was built thanks to the innovative, 15-year munitions acquisition supply solution contract signed by the MOD back in 2008, and sustains more than 200 jobs. What will happen with such long-term contracts, which are so important to my constituency?

Nobody would suggest that everything that occurred under previous systems was not good. Clearly, there are exemplars—some contracts worked well. I am sure the facility in the hon. Lady’s constituency will be a great success and that it will support employment for many years to come, but the fact that we will have a more private sector-rooted procurement body will not have any negative impact on such contracts.

The shadow Minister spoke of the budgetary challenges facing all Governments, but was quick to gloss over her legacy—the budget was taken away from the MOD by Labour and given to the Treasury. Does the Minister share my surprise at Labour Members questioning the new avenues of efficiency when, if they looked at the National Audit Office major projects report 2010, they would see that the majority of major projects overran, including the A400M, the Astute and the Typhoon?

Order. The question was simply far too long. I do not know why the hon. Gentleman is smirking about it—

There have undoubtedly been serious problems with the procurement side of the defence business for a very long time. The deficit in defence from two years ago was in very substantial part caused by the overheating of the procurement budget, but we have taken dramatic steps in the past couple of years to get the defence budget back into balance. The Treasury can see the progress we have made, but the steps we are proposing today will not be taken unless it is satisfied by the work on value for money that is currently taking place.

As the Minister has acknowledged, there have been long-standing problems in defence procurement. The Public Accounts Committee has taken a keen interest in the matter. Will he outline exactly what steps he is taking to ensure that the establishment of the GOCO model is well worked up, so that we do not have some of the problems that we have had with other procurement bodies in the past?

The hon. Lady makes a good point—that is why I was at pains to spell out at the outset that the process has some considerable way to go. Only when the work on value for money is completed will a decision be taken on whether we are going ahead in principle. At that stage, we will work the model up in detail and look for a competition with private sector partners. At the end of all of that, there will be a final testing, which must satisfy the Treasury, among others. That will be the point at which a decision to go forward will be taken. There is a long route to go.

Does the Minister agree that a key indicator of the success of either of the two models that he has described will be the attitude towards small and medium-sized enterprises in defence tendering in instruments such as pre-qualification questionnaires, which are generally unhelpful to SMEs?

My hon. Friend makes good points on the difficulties that SMEs believe they currently have in some of our big procurement projects. Since the move to the MOD contracting directly with prime contractors, which then handle subsidiary contracting, it would be true to say that the MOD has rather lost the skill set of managing SMEs. By the time the reforms are complete, I hope that a GOCO of the sort I have described will reinvest in those skill sets and that we will be better able to manage SMEs directly.

In the light of what the Minister has said on sovereign capabilities, and the fact that Aldermaston is already a GOCO, how will the successor deterrent programme be different if it is transferred into a GOCO?

There will be very little difference. The fact of the matter, however, is that the project management undertaken on behalf of the MOD by DE&S will—I say this with considerable confidence—be better, because there will be a higher level of skills in DE&S. It will bring in a variety of new commercial skill sets of which it is currently short. That will secure better value for money and more efficient delivery of the contract.

I thank the Minister for his openness with the House at this early stage in his considerations. Will he commit to write to Members of the House who represent the DE&S work force as the project progresses, particularly in relation to the protections available to them under TUPE regulations?

My hon. Friend makes a good point, and I have been at pains to stress that despite DE&S lacking some of the skills it needs going forward the work done by those who work for it is of a high quality and is much appreciated by the MOD. We are consulting the work force and the trade unions as we take these steps forward, and as part of the ongoing consultation we will be happy to talk to Members representing constituencies where the majority of DE&S staff are based.

For clarity, who in the future do the Government intend to be accountable for failures to deliver contracts on time and on budget?

The MOD will be the customer of the organisation and is responsible to Parliament for everything it does. If there is a failure, the buck will stop with the MOD.

Is the Minister saying that under this proposal British small and medium-sized enterprises in the defence industry will benefit?

I sincerely believe that SMEs in Britain will benefit because, at the moment, they get all their work through prime contractors, and it is a common complaint of SMEs that they do badly out of prime contractors. If we rebuild the skills inside DE&S so that it can manage the supply contracts from SMEs directly—in some instances—they will benefit. That is certainly what SMEs are telling us.