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Defence Equipment and Support

Volume 739: debated on Tuesday 17 July 2012


My Lords, with the leave of the House, I shall now repeat in the form of a Statement the Answer given by my right honourable friend the Secretary of State for Defence to an Urgent Question in another place on defence equipment and support. The Statement is as follows:

“A key element in the transformation process under way in the Ministry of Defence is that of its equipment and support activities through its Materiel Strategy. Reforming the acquisition system to drive better value from the defence budget is a core element of the transformation process under way in the Ministry of Defence.

This will require changes to the Defence Equipment and Support organisation to ensure that it 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 which have resisted previous attempts at reform. The current system does not help or support DE and S properly, and it is not delivering value for money for the taxpayer.

Analysis reveals the following root causes: a historically overheated equipment programme, in which far more projects were planned than could be paid for; a weak interface between DE and 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 insufficient levels of business capability at DE and 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 which could be derived from changing DE and S into either 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 the ENDPB option. Further value-for-money work is under way to confirm this assessment.

In the mean time, 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 developing and testing the GOCO option further. 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/SP 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”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating as a Statement the response to the Urgent Question that was accepted and answered in the other place earlier today.

The Secretary of State also issued a Written Ministerial Statement today, the last day before the House of Commons breaks for the Summer Recess. In that Written Statement as well as in the Statement that we have just heard, the Secretary of State set out his views on why the present system of procurement did not work as effectively as it might. He went on to say that the restructuring of defence equipment and support was key to maintaining the defence budget in balance.

Two options for restructuring have been considered—namely; either an executive non-departmental public body, with a strategic partner from the private sector, or a government-owned contractor-operated entity. The Government take the view that the work done to date “suggests” that the case for the government-owned contractor-operated company is stronger than the first option, but say that further value-for-money work is under way “to confirm this assessment”, which indicates that in the minds of some a conclusion has already nearly been reached.

In the mean time, the Secretary of State said in his Written Statement that,

“as resources and commercial appetite constrain our ability to pursue these two options simultaneously to the next stage, I have decided that MOD should focus its effort on developing and testing the GOCO option further”—

that is the government-owned contractor-operated option.

I have a number of questions for the Minister, although, before I start, I must say that I am not expecting him to be a walking encyclopaedia. If he is not able to respond to all my questions, it would be more than acceptable if he were able to give the answers subsequently in writing.

First, what would be the additional cost of pursuing the two options simultaneously to the next stage, and what exactly are the “resources and commercial appetite” constraints referred to? Unless it is going to cost a substantial sum, the constraints cannot be financial since the Secretary of State has told us that he has balanced the defence budget. He has also told us that the restructuring of defence equipment and supplies is key to the process of maintaining the budget in balance. This is hardly an issue one would have thought appropriate for not undertaking with complete thoroughness and openness and testing fully the merits of the two options when the Government agree that the work done to date only “suggests” that the GOCO option might be better.

The Secretary of State said more than once in his Statement today that the criterion is value for money and apparently only value for money. Is it literally the case that no other factors will be taken into account in determining the most appropriate form of restructuring for defence equipment and supplies? What factors are included within the criterion of value for money? Issues of national security must surely be involved in defence procurement, including security of sensitive information or the potential loss of skilled staff who may not wish to move to the private sector under the new structure proposed. How will non-monetary considerations be assessed against a value-for-money criterion?

The Statement refers to having a competition for the private sector management company to run the organisation. What kind of companies will be invited to tender? Will they be major defence contractors and, if so, would there not be a potential conflict of interest if such a company were running an organisation awarding contracts? Or, will major defence contractors or companies with defence contracts be excluded? In which case, what skills or expertise in the defence field would such a management company be expected to be able to show?

After all, we need to be very careful. We have just had an example of a major private company involved in the Olympic Games on the security side which has not exactly excelled itself. One of the issues in that case is that the Home Office said that it was not aware of the impending failure to deliver because contracts were with LOCOG and not direct with itself. Is that not a possible likelihood with the GOCO: namely, that Ministers become a step further removed from knowing what is actually happening, with the potential consequence of the kind of situation we have seen with G4S? The GOCO appears to bring a third party between the defence contractors and the Ministry of Defence, which may not be helpful.

Under the GOCO arrangement, where will commercial risk within the private sector lie in future? In particular, what commercial risk would lie with the GOCO? The GOCO will have contracts with defence contractors. If the defence contractor fails to deliver, presumably the defence contractor picks up the bill. However, what happens if changes are made to the specification? Will the GOCO and the private management company bear the additional costs, or will they continue to lie with the Ministry of Defence? What expertise is it considered that the private management company will bring that is not there at present? Will it be technical, or some other form, of expertise? Is it envisaged that all DE and S will be transferred over to the new private management company, and continue to work at its existing locations? Will military personnel continue to be part of DE and S if it becomes a GOCO, and on what basis will they be employed? As it will be run as a private company, will they be required to leave the Armed Forces? Is the reality in fact that the only change is that at boardroom level the GOCO will be run by private sector managers, who will not be required to have any defence experience, as opposed to DE and S being run by the Ministry of Defence?

Where will the GOCO fit in as far as the international dimension is concerned? There is the issue of our defence manufacturers being asked to provide equipment which will also meet specifications to make sales overseas achievable. There is also the political decision on whether to procure defence equipment from overseas which is made overseas, or whether to have equipment largely made and supplied from within our own country. Who will make those decisions: the GOCO or the Ministry of Defence? Will primary legislation be required if the government-owned, contractor-operated company is to be established?

The Statement by the Secretary of State also referred to testing the GOCO against a public sector comparator before finally deciding whether to proceed. Which public sector comparator would that be, and will the only criterion once again be value for money? Finally, how can we be assured that our brave troops on the front line, who it is widely accepted have the best equipment and supplies under the present DS and E structure, will continue to do so under the vague and unclear future now being proposed?

My Lords, the noble Lord is quite right; I am not a walking encyclopaedia. I will do my very best to answer as many questions as I can, but I will write to the noble Lord with the answers to the others. I will also put a copy in the Library.

I will try and take the questions as they came at me. The noble Lord asked why we need to change DE and S. For decades, the MoD has wrestled without success with the legacy problems of defence acquisition. It is clear that addressing the problems within current structures will be extremely challenging. We will, however, develop a public sector comparator based on DE and S-plus, which will be an on-vote solution with enhanced capabilities. The noble Lord asked if primary legislation would be necessary. At the moment we feel that it probably will not be, but we are putting in place all the building blocks just in case.

The noble Lord asked why the GOCO route was preferable. Work to date indicates that the strategic case for GOCO is stronger than that for an ENDPB with a strategic partner. This is based on the significant qualitative benefits that a GOCO would bring. These include the flexibility of the private sector, the increased resources available to support successful delivery and the introduction of a change in culture and behaviour to improve DE and S’s focus on the bottom line. It gives us much more strategic freedom by allowing us to manage staff in a flexible way and to bring in private-sector skills.

The noble Lord asked about value for money. Officials expect to complete work on the value for money analysis in the next few months, for consideration by Ministers in the autumn. The value for money analysis is an extremely complex area of work, representing a business change without precedent in government and requiring thorough analysis to enable discrimination between the options. This is a big decision and it is worth spending the extra time now to ensure that we make it for the right reasons.

The noble Lord also asked about members of the Armed Forces. The requirement is for specialised expertise, knowledge and skills in areas not currently found in DE and S and the wider department. This external support is key to getting DE and S into a position to create an effective organisation going forward. An important element of the future organisational design of DE and S will be ensuring that the military continues to play a key role, which will be important for individuals’ careers.

I was asked why we rejected other models. It is clear that addressing DE and S’s problems within the current structures will be extremely challenging. Changing DE and S to a trading fund was ruled out early on the basis that it would not be suitable for its business. It would also not be appropriate to privatise the organisation. The noble Lord raised the international situation and the position of our allies. We are working with our international partners to ensure that their interests are protected during the transformation of DE and S.

Those are all the questions I managed to write down. As I said earlier, I undertake to write to the noble Lord on any others.

My Lords, this is a very short Statement for a huge issue. I remember taking two Bills through the other place nearly 30 years ago to privatise the Royal Ordnance factories and contractorise the dockyards, which I understand is probably the best example of a GOCO. I want to query the Minister’s response that we are unlikely to need legislation. I would be grateful if he could further explore that.

I have four specific questions. First, who is studying the comparative benefits of the two main options? Are they just MoD officials or are consultants involved as well, and what is the cost of those consultants? Secondly, I refer to the claim that,

“resources and commercial appetite constrain our ability to pursue these two options”.

I really do not understand what commercial appetite constraints are. The noble Lord, Lord Rosser, also raised this point in his remarks. Thirdly, is either option likely to involve civilian redundancies over and above the 25,000 already being targeted by the ministry? Finally, are there any examples of other countries effectively outsourcing their supplier of military equipment in this way?

My Lords, I agree with my noble friend that this is a really big issue. I had only a short time in which to prepare for this Statement and that made me realise what a big subject this is. It may be an area on which we could have a debate in the House, and I would encourage my noble friend to go through the usual channels to see whether a debate could be set up. He asked why no legislation was necessary for this. I asked officials about that and their advice was that it is very unlikely—but just in case it is needed, all the building blocks are being put in place. No decisions on the future operating model of DE and S have yet been taken. The GOCO may require legislation, but the issue will be addressed in due course.

I cannot answer my noble friend’s question about whether it was just MoD officials involved in the decision-making process, but I understand that there will be no additional redundancies as a result of these changes. I am pretty certain that that is the correct answer.

My Lords, one of the criteria that Mr Bernard Gray identified in his major study of DE and S was that a budget provision for a 10-year period should be made for the equipment programme. Many instances of overloading the programme in the past have probably been attributable to changes in the budget provision, which the Ministry of Defence had expected. Has an agreement been reached on the lines of what Mr Bernard Gray was looking for, with a 10-year guaranteed budget for the equipment programme? Without that it will be difficult to be sure that we will not overload the programme if there are cuts.

I can assure the noble and gallant Lord, Lord Craig of Radley, that Bernard Gray, who wrote the report, is now working for the MoD—poacher turned gamekeeper. I am confident that he has extracted a lot of the assurances that he was after.

My Lords, can my noble friend confirm that the input of the chiefs of staff into the initiation of the defence procurement process—namely the preparation of staff targets and staff requirements—will remain untouched after the changes that he proposes?

My Lords, I cannot give my noble friend that assurance, but I am pretty certain that the Chiefs of Staff will have had strong reassurances on that issue.

My Lords, I am in no doubt of the need to improve the overall performance of Defence Equipment and Support. However, I have lost count of the number of major reorganisations to which the mechanisms for defence acquisition and logistic support have been subjected over the past decade and a half. It seems unreasonable to expect superior performance from any organisation that spends almost its entire time studying its own navel. Can there be sufficiently wide-ranging consultation this time so that whatever emerges from this particular exercise has some chance of enduring for at least a number of years, and so that we can get some performance out of the organisation rather than a wholesale change of deck-chairs every few years?

My Lords, the noble and gallant Lord makes a good point. As we said in the Statement, no decision will be taken until the end of the year. We want to discuss this with as many people as possible, not least our own workers and the trade unions, so I can reassure the noble and gallant Lord.

My Lords, I endorse the point that my noble friend has made: we should have a debate not only on this matter, but on many other matters. Perhaps a debate will go some way towards highlighting the matters that the noble and gallant Lord, Lord Stirrup, mentioned. We have had severe and deep cuts to the Army, and questions as to the inequitable nature of the redundancy payments and of the capacity and capability of the reserves, however willing they are. But on this matter, will my noble friend explain the advantages to the Armed Forces of privatising the Defence Equipment and Support organisation? I hope that factors such as security of supply, urgency, value for money, secrecy and commitment are paramount in the minds of those who are deciding this policy.

My Lords, I would certainly welcome a debate on this subject, not least of all because it would give me more time to swot up on a complicated subject. As for the advantages of privatising Defence Equipment and Support, and as far as the Armed Forces are concerned, there is a compelling case for reform. Analysis has shown that cost and schedule overruns have resulted in significant additional cost to the defence budget of the order of hundreds of millions of pounds each year. A GOCO offers the greatest likelihood of focused and sustained improvement. It has the strongest incentive for culture change and a drive for productivity. The Armed Forces will benefit from getting equipment and services on time and at the right price.

My Lords, do the Government believe in the concept of a defence industrial policy? It seems to some of us that in reality this plan may mean that within a fairly short time we will be buying off the shelf from anywhere, at the expense of—and with no regard for—the British defence industry, which is an excellent manufacturing industry, one of the few that remain, providing many jobs and great skills, very much to the benefit of this country. Some of us worry that the ultimate consequence of this sort of decision will be to kill off the British defence industry. Does the noble Lord agree?

My Lords, it is very nice to see the noble Lord back here discussing defence issues. I can assure him that we buy the best equipment for our Armed Forces. That is our starting and ending point.

My Lords, currently Defence Equipment and Support has stewardship of a key front-line activity, logistics support, which includes such things as running naval bases. However successful or otherwise one might view Defence Equipment and Support’s performance in this area, the current shock with respect to outsourcing of major critical activities has to be a concern. Can the Minister reassure the House that the area of logistics support to the front line will be very carefully guarded; for example, passing back the running of naval bases to the single services?

My Lords, I can give the noble and gallant Lord that reassurance. Obviously, in the light of the G4S issue, we are looking at it even more carefully.

Can the Minister say whether the withdrawal of equipment that is surplus to requirements from areas such as Afghanistan will have any effect on the equipment programme?

My Lords, we will have to decide whether to take the UOR equipment back into the core defence budget. It is much too early to give my noble friend an answer on that. We are looking at it very closely.

My Lords, in mulling over his reply to the noble Lord, Lord Hunt of Kings Heath, will my noble friend—

I am sorry, the noble Lord, Lord Bach. It is a mistake I have made before. Bad map-reading; I apologise.

The noble Lord should not insult my noble friend Lord Hunt of Kings Heath, but he is not the first to do so.

My Lords, if I can start again, can my noble friend tell us whether in any debate that we have he will be prepared to answer questions about how research and development will be continued under the new organisation? It is very important that the budgetary and technical skills of the department, the military and the commercial suppliers are co-ordinated. How is that going to be managed and by whom?

My Lords, my noble friend makes a very good point. If we do have a debate, I undertake to answer as many questions as I possibly can, and I would ensure that I got sufficient briefing to answer my noble friend’s question on this important issue.

My Lords, some of us in this House have had experience of a GOCO being established in Northern Ireland to run the water industry. My colleagues will know that it has not been a very pleasant experience. I urge the Minister to look at that example because failure in this area would be much more catastrophic. Is not planning for defence infinitely more difficult than virtually any other area of Government because events quite often occur that require changes in specification, which generate most of the cost overruns?

I also support the point made by the noble Lord, Lord Bach. We are second in the world in aerospace at the moment and there are strategic reasons why we need to maintain a defence industry, which do not always mean the cheapest contract wins. We have to maintain a long-term strategic capability in this country. I would certainly be looking forward to seeing that issue addressed in any proposals. I echo what other noble Lords have said in calling for an early debate on this and related issues.

My Lords, as we said in the Statement, we have undertaken to consult as widely as possible, so I encourage the noble Lord to feed in any issues he has in relation to the water GOCO so that any lessons can be learned. I, more than anyone, want to see a strong defence industry in this country and we will do what we can to ensure that there is one.

The Minister said that he wants to consult as widely as possible. What form will that consultation take? We have had a Statement and a number of questions to which there are, apparently, no answers because the Minister says he has not been briefed. Will there be a Green Paper? Will there be a debate? What are the answers? It is a sad day in this House when we have a Minister saying, “I am terribly sorry, but I do not know the answer to any of these questions”.

My Lords, that is very unfair. I did not say that I had not been briefed; I just said that I would welcome a debate because it would give me much more opportunity to talk at greater length about these very important issues. I never said that I had not been briefed—that is completely untrue—but I would welcome a debate in order to air all this and to hear any questions and issues that noble Lords have on this important subject.

My Lords, following the question from the noble Lord, Lord Bach, about the need to maintain a strong British defence industry, and the Minister’s agreement with that, is there any constraint on that policy through having to obey the strict rules under the single market by which contracts have to be advertised throughout the European Union? Value for money is an absolute, although there may be constraints upon the cost that is paid.

My Lords, as I said earlier, I want a very strong British defence industry. We have to obey EU industrial rules, whether I like it or not; we have to stand by them.