My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Defence Secretary. The Statement is as follows:

“With permission, Mr Speaker, I wish to make a Statement on defence acquisition. In December 2008, my predecessor asked Bernard Gray to undertake a review to identify improvements that we could make in the acquisition of defence equipment. On Thursday, I published Mr Gray’s report and placed a copy in the Library of the House in advance of our defence policy debate. I said then, and I repeat now, that I apologise that honourable Members did not have longer to read and digest a report that is both lengthy and complex. I therefore welcome the opportunity that you have provided today, Mr Speaker, for a further discussion to take place on its content. Indeed, I suspect that today will not be the end of the conversation.

Mr Gray’s recommendations are far-reaching. We accept most of them and work is in hand, as part of a wider acquisition reform strategy, to implement the changes that we agree are needed. Mr Gray’s report has got the debate well and truly started, which is something that I warmly welcome. It is an important subject and one that we very much wanted to surface. That is why we commissioned this report.

I am very grateful to Bernard Gray for the effort that he has devoted to this, the analysis that he has produced and his support in developing proposals with my department to implement many of his recommendations.

This is not a new issue. As Bernard Gray’s report highlights, all countries with significant defence capabilities face the same inherent complexities of military acquisition and, over many decades, have had to deal with cost and time overruns. Indeed, as the report says, many of our allies are complimentary about the UK’s efforts to drive reform in this area and model their systems on ours.

In the past 12 years, we have implemented a succession of initiatives to improve acquisition processes, including ‘smart acquisition’, the defence industrial strategy and, more recently, the defence acquisition change programme. These have had a significant impact on performance, as the National Audit Office has recognised in successive reports. At its best, my department’s project management is very good indeed. As the report observes, there are dedicated people at all levels in the Ministry of Defence and among our suppliers, with a strong commitment to ensure that the services have the equipment that they need to deliver success on current operations and in the future.

The system works best when the need is most urgent. We have successfully provided £4.1 billion-worth of equipment to theatre in Iraq and Afghanistan through urgent operational requirements since operations began. Our people, military and civilian, can be proud of that achievement. The service chiefs have made it clear that our service personnel are never asked to undertake missions unless we are fully satisfied that they have the right equipment to do the job.

However, the Gray report also brings out, through analysis of a sample of individual projects, the problems that still persist. These include not only the tendency of programmes to cost more and take longer to deliver than was initially estimated but the further cost growth to which this gives rise and the pressure that it places on limited resources, even in a period when the defence budget as a whole has grown substantially in real terms. The report points to remaining skills gaps and to shortcomings in the existing arrangements for managing the equipment programme and it argues for regular defence reviews to provide a strategic context for decisions on the equipment programme.

To some extent, the difficulties that we and others face in estimating the cost and time to deliver projects reflect the fact that much modern defence equipment is at the leading edge of technology and is constantly having to adapt to meet evolving military requirements. Providing our Armed Forces with the best involves a degree of technological risk and uncertainty, but there are steps that we can and must take, in the light of the Gray report, to build on earlier reform and deliver a radical improvement in performance.

First, I have already announced that we will undertake a Strategic Defence Review immediately after the general election. Preparatory work is already under way and I intend to publish a Green Paper early in the new year. We will also examine legislative frameworks for implementing Bernard Gray’s recommendation that a Strategic Defence Review be conducted early in the term of each new Parliament.

Secondly, we will work to adjust our equipment programme to bring it into balance with future requirements and the likely availability of resources through the current planning round and, in due course, the Strategic Defence Review.

Thirdly, we will plan equipment expenditure to a longer timeframe, with a 10-year indicative planning horizon for equipment spending agreed with the Treasury. We will increase transparency by publishing that planning horizon and an annual assessment of the affordability of our programme.

Fourthly, as recommended by Mr Gray, we have already strengthened board-level governance within the Ministry of Defence by establishing a new sub-committee of the Defence Board, chaired by the Permanent Secretary as accounting officer and charged with determining, for agreement by the board and Ministers, an equipment plan that is aligned with strategy, affordable and realistic.

Fifthly, we will improve the way in which we cost projects in the equipment plan, using better and more sophisticated techniques applied more consistently and ensuring that investment decisions are based on the most reliable available forecasts. We will also improve the management of risk across the programme.

Sixthly, we will introduce stronger controls over the entry of new projects into the equipment programme and over changes in performance, cost and timing of individual projects.

Seventhly, we will sharpen the business relationship between the Ministry of Defence head office, the Defence Equipment and Support organisation and the service commands by further clarifying roles and responsibilities and by establishing new arrangements to provide greater visibility of project management costs in DE&S to the capability sponsor in head office.

Finally, we will accelerate the improvement of key skills, including in cost forecasting and programme management, in DE&S and the Ministry of Defence head office.

All these changes are consistent with Bernard Gray’s main recommendations. I do not intend to take up his suggestion to establish DE&S as a government-owned, contractor-operated entity to put it more at arm’s length from the rest of the Ministry of Defence. The Government have thought about this carefully, but we are not convinced that such a change would ultimately lead to better outcomes for the Armed Forces or defence generally.

Having DE&S as fully part of defence ensures a close working relationship with the military. Equipment acquisition is core business for my department and we have to get it right. I intend to publish a wider, more detailed strategy for acquisition reform based on these proposals in the new year to contribute to work on the Strategic Defence Review. I am delighted that Bernard Gray has agreed to work with us on this and we look forward to pressing ahead to make the changes that are needed”.

My Lords, I thank the Minister for repeating the Statement. We welcome this report; it has been long awaited. We are also delighted that Bernard Gray has agreed to help the MoD to implement many of his recommendations.

At a time when we are at war, the findings of the Gray report reveal more than just financial mismanagement. The leadership vacuum created by this Government is on display for the entire world to see. Our brave troops in Afghanistan are suffering the worst consequences.

The report expresses what many observers of the defence procurement process have long believed: the procurement system is dysfunctional. The net result has been to damage the efficiency of the Armed Forces, as they do not receive the equipment that they need when they need it.

All those involved in the defence procurement process will welcome both clarity and predictability in the way in which the Government engage with industry, the MoD and the Armed Forces. Our service men and women surely deserve the best equipment that we can give them, just as British taxpayers deserve the best value for their taxes.

Some of the most troubling facts revealed by the Gray report are that the average procurement programme overruns by 80 per cent, increases by an average of £300 million and creates a host of additional costs to the MoD. As the report states, the MoD equipment programme is,

“unaffordable on any likely projection of future budgets”,

or spend profile. Too many types of equipment are being ordered for too large a range of tasks and at too high a specification. As the report observes, defence planning is not conducted in tandem with the costing of options. The Government’s poor financial planning allows them to promise more defence capabilities than the MoD can afford.

The Minister gave a pledge, reported in the Financial Times on Friday 16 October, to,

“implement most of the recommendations of this report within six months”.

Can the Minister reassure the House that this will be the case and that this report will not suffer the same fate as the Government’s defence industrial strategy, of which the Minister was the chief proponent?

Of all the recommendations, the key one seems to be proposed reform within the DE&S. The report addresses the fact that existing commercial practices and project management are inadequate; there is a blurring of roles and accountability between the identification of capability and the ability of DE&S to deliver it. What steps will the Government take to address this deficiency? Will the Government identify those programmes that they deem no longer meet the requirements for current or projected operational scenarios? Is it not better to be honest with defence contractors that keep design teams going at some considerable cost? Can the Minister elaborate on how the Government will clarify the roles between the capability sponsor, the customer and DE&S and the efforts to improve commercial skills within the department?

Aspects of MoD accounting and process would not be countenanced in a private sector organisation—for example, the exclusion of costs from the planning process and the refusal to use external commercial lawyers to approve contracts before signing. The report makes it clear that the costs of delay or programme changes are not measured in any systematic way and there appears to be a lack of programme management and commercial and financial skills at the DE&S. However, the Government have already declined to accept the report’s recommendation that the DE&S should be changed into a separate, publicly owned, contractor-operated body, with private sector management drafted in to get to grips with the MoD’s cost overruns and programme delays. Will the Minister explain more fully why this recommendation was rejected by the Government?

I understand that there were concerns that the military’s role in the purchase programme would be removed, but this seems strange, as the report recommends that military personnel remain integrated in secondary positions. Does the Minister agree with the report that, while many of the problems in acquisition have occurred for a long time, “smart acquisition” has had a limited impact in improving the situation?

Finally, despite their importance to industry and the UK economy, the Statement makes no mention of defence exports, which were discussed in the report, particularly the French aspect. What is his department doing, in the light of the comments on defence exports, to maximise exportability of UK defence equipment?

My Lords, at Question Time in your Lordships’ House on 9 July this year, I said that,

“in the private sector, if one trades when one knows that one’s operation is insolvent, that is a criminal offence. At the present time, the Ministry of Defence, frankly, is bust. There is a yawning gap between resources and commitments”.

The noble Lord, Lord Drayson, replied:

“My Lords, I am afraid that I do not recognise at all the characterisation that the noble Lord has just set out”.—[Official Report, 9/7/09; col. 760.]

The noble Lord is known as a very bright chap with a successful track record in the private sector. Surely when he answered my question the Government must have been aware of the scale of the problem because, as the Gray report points out,

“On average, these programmes cost 40% more than … originally expected … and are delivered 80% later than first estimates predicted. In sum, this could be expected to add up to a cost overrun of approximately £35bn”.

That is equivalent to approximately one year’s total defence expenditure. The phrase in the Statement on,

“the tendency of programmes to cost more”,

must be the understatement of the year. Surely Ministers and officials must have been aware of the scale of the problem, yet the Government chose to sail on. Looking back, surely it was irresponsible to place orders for the two new aircraft carriers—with, no doubt, substantial penalties for cancellation and their implied major costs of aircraft, to say nothing of manning and escort costs—against the financial background of which we now hear. The Statement also uses this rather extraordinary sentence:

“The service chiefs have made it clear that our service personnel are never asked to undertake missions unless we are fully satisfied that they have the right equipment to do the job”.

How can that possibly square with the equipment deficiencies that we were certainly aware of as the Afghanistan campaign commenced?

On the report itself, in my copy pages 48 to 51 and pages 68 to 71 appear to be missing, while pages 52, 54 and 64 to 66 are duplicated. How long have Ministers been sitting on the report and, linked to that, how long did they deliberate before rejecting Gray’s recommendation to establish the Defence Equipment and Support organisation as a government-owned, contractor-operated entity? Will L.E.K. Consulting be continuing its work on the implementation phase and will private sector expertise be called on to implement certain changes?

Overall, however, as far as these Benches are concerned, we very much welcome this thorough report and support many of its recommendations. Indeed, we ought really to have a full debate to do justice to its importance and scale. We particularly welcome a more frequent and regular Strategic Defence Review and the recommendation to,

“plan equipment expenditure on a longer timeframe, with a 10-year indicative planning horizon for equipment spending agreed with the Treasury”.

Finally, in broad terms, how do the Government intend to balance the books—by providing more resources or by cancelling major projects? There really is no third way, irrespective of the Gray report, which quite rightly focuses on future procurement matters.

I begin by saying how much I agree with the noble Lord, Lord Astor, when he states that our Armed Forces surely deserve the best equipment and that the taxpayer deserves the best value for money. They absolutely do. In response to the point from the noble Lord, Lord Lee, about the scale of the problem that we face, I accept that this report shows that in stark relief. Taking into account the fact that the report was based upon a sample of projects—so that it did not review all defence procurement projects— the conclusions coming from that review are, none the less, pretty stark. We really do need to improve the performance in the Ministry of Defence.

However, the noble Lord asked me a direct question about whether or not Ministers were aware. It is quite clear that Ministers have certainly been aware—including me, as a former defence procurement Minister—of the long-standing challenge of managing defence procurement effectively, as have many of my predecessors. However, the size of the problem that Mr Gray has identified takes us further in two respects. First, it shows the scale of the problem, which is extremely significant. Secondly, it goes to the heart of the causes of the problem in a way that previous reviews, going back many decades, have not. That comes from two areas. He first asks questions about the framework within which defence procurement projects have to be decided, and then he asks questions, given that framework, about the performance of the defence organisation in implementing the management of those projects.

On the framework, the fact that Mr Gray has identified the need for much more regular Strategic Defence Reviews every time there is a new Parliament, and for the defence equipment plan to be planned within a 10-year planning framework agreed with the Treasury, provides an effective framework to enable the reality of defence procurement to take place in an effective manner. The control, which will now exist from the new executive committee, of having an affordable plan sign-off annually within that regular Strategic Defence Review gives the Ministry of Defence an opportunity to manage this well, in a way that it has not done before.

I absolutely reinforce what I said last week. I was asked by noble Lords about implementation. Our target is to implement these reforms—which we accept despite their stark nature—within six months. We need to fix these problems. Bernard Gray has identified in his review how each service in the Armed Forces quite rightly acts to do the best for each service, but that the way in which that is managed between the three services does not provide the best result for defence as a whole. The clarification of the roles between the service and the providers needs better discipline within a structure, strengthened with better training of personnel in planning and project management.

That goes to the heart of why, after reflecting for several weeks on the recommendation of a GOCO, we have decided that that would not be the right thing to do. We have learnt over the past few years that the reforms that we have implemented have been seen to be successful—in particular, I point to the success in delivering equipment to operations through the UOR process. Having the military absolutely integrated into the acquisition process, whereby military personnel who have recently returned from theatre are working with civilians and industry to deliver projects, is the way to deliver kit that is absolutely fit for purpose. Although, if one privatised the DE&S and separated it into a GOCO it may be possible to retain military expertise for a period of time, that military expertise would become outdated in pretty short order because it would not be possible to have military personnel from the armed services, from operations, working within that organisation. We have therefore concluded that we need to implement the reforms on improved skills, but to do so while retaining the defence procurement function centrally within the Ministry of Defence.

The draft report was provided to Ministers in July. Since then, we have been working with Bernard Gray on the detail of his report and potential recommendations and, therefore, on a plan of implementation. We will be working with Mr Gray and with L.E.K. Consulting.

Finally, the noble Lord asked how the Government intend to balance the books. The books may only be balanced through an SDR. We have committed to carrying out that SDR immediately after the general election. We will be setting out in our Green Paper early in the new year the themes that will lead into that SDR. That gives the Ministry of Defence the best possible chance to plan, in the run-up to the general election, the answer to that important question.

My Lords, I listened to the vast majority of the noble Lord’s Statement and was considerably shocked by the enormous list of “We will do this and we will do this”. There was then the admission of a £35 billion overspend. What on earth have Ministers been doing for the past 13 years? Let us assume, for the sake of argument, that the Tory Government were as incompetent as this Government—I do not necessarily take that on board—and that the Government inherited an incompetency; they have allowed it to run for 13 years and have made it worse. This is the most damning indictment that I have ever heard of any government department, and that includes the Tanganyika groundnut scheme that occurred in my youth.

My Lords, I hear what the noble Earl says, but did he ask me a question?

Yes; why?

I say, seriously, that the noble Earl is asking the right question. It is to the credit of the previous Secretary of State that he asked for this review, which constitutes a true pulling up of the carpet in having a look at this process. It is to the credit of the present Secretary of State that he has accepted this very critical report in its entirety and that the department has accepted its recommendations and is committed to implementing them.

The answer to the noble Earl’s question concerns the complex reality of delivering the most technologically sophisticated equipment, in the context of the speed of technology change, in order to achieve the important goal of delivering military capability where lives are at stake. This challenge of defence procurement is huge. That is no excuse, but we should not underestimate what it will take to fix it. I truly believe that the Gray review has got to the heart of this problem in a way that no other review has done, and I am committed to ensuring that Bernard Gray’s recommendations are now implemented.