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Defence and Security Public Contracts (Amendment) (EU Exit) Regulations 2019

Volume 795: debated on Monday 4 February 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Defence and Security Public Contracts (Amendment) (EU Exit) Regulations 2019.

My Lords, a responsible Government plan for all eventualities. It is essential that, as part of our preparations to leave the EU, we make sure that our legislation governing defence and security procurement functions properly beyond exit day in a no-deal scenario. It is the first duty of the Government to keep their citizens safe and the country secure. As part of that, the Government need to be able to procure the critical equipment and capabilities they need smoothly and with confidence. In the event of no deal, these amending regulations will provide procurers and suppliers with legal continuity and certainty, giving them the stability they need to conduct business after 29 March.

Clearly, the amendments to the legislation reflect the UK’s new status outside the EU in a no-deal scenario. However, the framework and principles underlying the defence and security procurement regime remain otherwise unchanged. This is in accordance with the powers given to amend retained EU law in the European Union (Withdrawal) Act 2018. That Act does not allow major policy changes or the introduction of new legal frameworks beyond those that fix deficiencies to ensure the law continues to function properly or remove any reciprocal obligations that are no longer appropriate from exit day.

Brexit will offer us real opportunities, including reform of our defence and security procurement regulations. In the near term however, these amending regulations ensure that the UK’s defence and security procurements continue to function smoothly in a no-deal scenario, but with that all-important autonomy from the European Union. To protect the UK’s essential security interests, the amending regulations will maintain the effect of Article 346 of the Treaty on the Functioning of the European Union by writing its substance into the existing regulations. The regulations already make it clear that they can be trumped by Article 346. Article 346 enables us to disapply the defence and security procurement rules when necessary to protect essential national security interests.

Through the amendments, control over our procurement is returned to the United Kingdom. For example, the Secretary of State for Defence will take the power previously held by the European Commission to modernise, although not broaden, the 1958 list of warlike stores that falls under Article 346 (1)(b). All notices for defence and security procurement opportunities will in future be published on a new UK e-notification system. Business continuity, meanwhile, is assured through the transitional provisions; there will be no defence procurement cliff edge.

Competition remains the cornerstone of defence procurement policy to ensure we equip our Armed Forces with the right capabilities at the right price. Currently, we allow bids from suppliers outside the EU, although the existing regulations provide only the legal right of market access required by EU law for suppliers based in the EU. Any restrictions on bidding, for example, on national security grounds, are made clear from the outset of any procurement.

The amending regulations provide a legal right of market access for suppliers based in the UK and Gibraltar which currently enjoy rights under the EU defence and security directive. After exit day, we will still allow bids from suppliers in the EU on the same basis as we do now for suppliers currently outside the EU. This reflects the UK’s new status as a third country outside the EU.

Although the amending regulations are mainly about EU exit in a no-deal scenario, they also make some updates and corrections to the Defence and Security Public Contracts Regulations 2011. They will come into force before exit day regardless of whether there is no deal.

To sum up briefly, it is through these amending regulations that the Government will ensure that UK defence and security procurement continues to function properly and appropriately, with solid legal foundations underpinning it. It is this instrument that will give procurers and suppliers the confidence and continuity in procurement they need in a no-deal scenario. I commend these regulations to the Committee. I beg to move.

My Lords, this is the first statutory instrument related to Brexit that I have had the joy, or misfortune, to be involved with. In that sense I am quite glad that it has two purposes, one of which is valid regardless of whether there is a no-deal Brexit. However, one does wonder, given that the relevant legislation was repealed in 2011, why it has taken Her Majesty’s Government quite so long to bring this to our attention in the SI.

On the other aspect of the SI, many of the questions I have noted are very similar to the questions raised by noble Lords on the previous SI. According to the statutory instrument, Regulations 3 and 4 come into effect on exit day. Will the Minister explain what would happen in a transition period? Exit day would still presumably be 29 March, but at that point we would stop using the Official Journal to advertise things. Will we be in a situation where, somehow, the statutory instrument does not come into effect? Is it like the previous SI and will come into effect not on exit day, but only after some transitional period? Otherwise there would seem to be a bit of a gap. The UK would not quite be at a cliff edge, but the situation would be somewhat unclear because we would not have the situation I envisaged would be the case during the transition period.

I will ask various questions that go beyond the nitty-gritty of the regulations. Will the Minister explain what Her Majesty’s Government envisage by the statutory instrument in terms of access to UK markets? There is already a whole set of questions about overspends and the Public Accounts Committee has asked questions about defence procurement. If we are in a new world where EU defence contractors are treated like third-country defence contractors, have the Government modelled the impact this is likely to have on defence procurement? Will it mean that the UK will spend more on defence procurement than was the case when it was a member of the European Union? Similarly, what work have Her Majesty’s Government done on evaluating the impact on our arms export industry of not being part of the single market? If we are treating the EU 27 as third countries, presumably they will not exercise the reciprocity of access to their defence industry and defence exports that we have enjoyed. There are some wider questions on the impact the Government think we will see from Brexit if we are not part of the single market for defence exports.

I have various technical questions. Like other noble Lords, I have spent quite a long time reading the Explanatory Memorandum. I am intrigued to note that the Minister can confirm that it meets the required standard. What counts as the required standard, and what can we expect to see in an EM? Are there things that we might find even more useful for understanding what is going on? The memorandum is certainly rather easier to follow than the SI as it is drafted.

On page 3 of the Explanatory Memorandum there is a discussion about a current derogation from the Treaty on the Functioning of the European Union:

“It is necessary to ensure that contracting authorities can continue to disapply the 2011 Regulations where required”.

If we are leaving the European Union and therefore withdrawing from that treaty, how do we effectively apply the derogation from a treaty to which we are no longer a member? I am somewhat confused. The noble Lord, Lord Adonis, mentioned Alice in Wonderland. Applying something that looks like a derogation to a treaty to which we are no longer a signatory seems somewhat peculiar, but maybe I am missing something.

I note the references to Gibraltar, which is clearly of significance to our Armed Forces. I have a wider question: how do the Government envisage ensuring that the duty owed to economic operators in Gibraltar can be met in the absence of a deal? There is discussion of this in the Explanatory Memorandum, but there is very little to say how it would be seen in practice. As with the previous SI, what about state aid? Do Her Majesty’s Government envisage giving subsidies to the defence industry? Is that one of the expectations of Brexit? What are we to understand by that aspect of the Explanatory Memorandum when talking about state aid?

My Lords, the noble Baroness has asked a number of pertinent questions. I hesitate to intervene in this area, because this is the first time I have ever made any remarks in the House on defence issues. I have always regarded the defence of the realm as so capably safeguarded by other noble Lords, not least the noble Earl himself—and, indeed, his family historically—that I never thought I needed to intervene in such affairs. I have two questions, which will reveal my ignorance but seem to be important in the context of us leaving the European Union in a no-deal scenario. The noble Earl said that once we have left in a no-deal scenario, we will allow bids in the defence sector from inside the EU on the same basis as we currently allow them from outside it. What is that basis? Is it codified? Looking at it from a great distance, I have always thought that we are extremely selective in the countries and suppliers outside the EU from which we are prepared to entertain bids for defence contracts. For example, I do not believe that at the moment we entertain bids from Chinese companies—and some other countries—for extremely good reasons. What is the noble Earl saying? Is there a document to which he can point me, and those who will be reading these proceedings, showing the basis for bids being entertained? The noble Earl may correct me, but if the basis on which we allow bids from outside the EU at the moment is essentially arbitrary, will that be the same basis on which we allow bids from existing EU states after Brexit?

I know that the noble Earl was simply reading his brief, but in his positive-sounding remarks at the outset he said that there would be real opportunities in procurement from leaving the EU, which I took to mean also in a no-deal scenario. It is not immediately obvious what those real opportunities are. Will he tell the Grand Committee something about them, as there are many disadvantages in leaving the EU? Readers of our proceedings will be delighted to know that there are some opportunities and would be grateful for any optimism that the noble Earl can provide for the world after 29 March if we leave without a deal.

My Lords, I thank the noble Lord for introducing this statutory instrument. On the other hand, that is not really true: the facts of life are that I would rather not spend my weekend studying SIs for a scenario that is deeply absurd and the Government should have ruled out many months ago. It is, however, forced upon us.

Initially, I tried to read the Explanatory Memorandum while applying the test that I have been using so far—that there is no new policy except what is necessary to smooth the transition. That is essentially the test of the withdrawal Act. He has already said, however, that this SI goes beyond what is allowed in the withdrawal Act. I noticed that the SI also prays in aid the infamous—as I would call it—European Communities Act 1972, which must have the grandest powers of any piece of primary legislation. Since, therefore, this is quite important—that the Government are seeking to mix the two—I would be grateful if he could give a little more detail on where the 1972 Act has been used and where he is praying in aid the 2018 withdrawal Act.

I found the Explanatory Memorandum difficult to understand because it requires considerable previous knowledge. I can find only one area of concern. In general, the references to the requirement for a new organisation—for new parts of government to take over what is happening in the EU—all seem to make sense.

Essentially, I think the Minister has said that this SI leaves the situation unchanged. Does that mean that the requirement to put defence procurement up for both domestic and international tender is unchanged, except where derogated under provisions similar to Article 346, which I assume is written into the regulations? Does the derogation for national security reasons remain unchanged? Has it been decided that it should not be enhanced, as many of us would argue it should, to include wider, more long-term considerations, such as the preservation of UK sovereign capability by favouring UK firms in some circumstances? This measure seems to create a situation where the rest of the world can bid for UK contracts except where derogated. Does that mean that UK firms will be able to bid for foreign contracts, particularly opportunities in the EEA?

Finally, can the Minister indicate what will happen to these regulations in the event of a deal? Do they die in total or in parts? How will the deaths be managed?

My Lords, once again I thank the noble Lords who have contributed to this debate for their questions, which I will do my best to answer. The noble Baroness, Lady Smith, and the noble Lord, Lord Tunnicliffe, both asked a similar question about the coming into force of these regulations and the circumstances in which they might not come into force. These amending regulations apply only in a no-deal scenario, other than the changes being made under Section 2(2) of the European Communities Act.

The noble Baroness, Lady Smith, was slightly unclear as to how we could avail ourselves of powers under that Act if we are not a member of the community. The answer is that we are still a member of the European Union and we can avail ourselves of the powers under the 1972 Act until such time as we cease to be members. The very minor adjustments we are making will come into force regardless of whether there is a deal or no deal. If the withdrawal agreement enters into force, the UK, with certain specific caveats, will be treated as an EU member state for the duration of the implementation period. Therefore, the current DSPCRs will continue to apply for that period, albeit with the updates and corrections made in Regulation 2.

The noble Baroness and the noble Lord asked about those changes. They are very minor. They are, in the main, changes required to resolve outdated references and to correct an omission arising from an amendment to the European Economic Area agreement. There is an amendment to the definition of “member state” to add Norway and Iceland, ensuring that economic operators from those two EEA states are covered. Again, that amendment is required regardless of whether the exit-related changes come into force. There are various other minor changes that I can read out, but I think it would be tedious if I were to do so.

The noble Baroness and the noble Lord, Lord Adonis, asked about the effect of the coming into force of these regulations on UK companies and what the benefits to UK industry are likely to be. The main benefit for both UK and Gibraltarian suppliers will be stability and continuity of working regulations, which are well established, understood and practiced. Importantly, UK and Gibraltarian suppliers will continue to enjoy legal rights to participate in UK defence and security procurements. Other non-UK economic operators, save for those in Gibraltar, will not have these rights under the amending regulations. I make it clear that that is not to say that only UK or Gibraltarian suppliers can bid for defence and security procurements. As noble Lords will know, the UK has a long-standing practice of allowing overseas suppliers to participate in defence and security procurements where there is no need for restrictions on who can bid in some way—for example, on national security grounds.

The noble Lord, Lord Tunnicliffe, asked whether UK companies would be disadvantaged regarding their access to the EU market. As a matter of EU law, EU member states will no longer be legally obliged to open their defence and security procurements to UK suppliers, as the EU defence and security directive will no longer apply to the UK after exit day. However, it has to be said that our UK suppliers are recognised as world class. They offer extraordinary experience and expertise in defence. Individual EU member states therefore may choose to give UK suppliers access to their competitions to maximise the effectiveness of their procurements in the same way as the UK does. There is a strong case in terms not only of value for money but of other considerations, such as interoperability and cutting-edge capability.

I feel that I have lost my place. Is the Minister saying that non-derogated invitations to tender will be restricted to the UK suppliers and Gibraltar, or will they be available to worldwide competition, with certain exceptions?

It will depend on the procurement. If it is determined that the procurement rate relates to an issue necessitating the protection of UK sovereign capability, as in the case of the construction of warships, we would restrict the tendering process to UK-based suppliers. However, the generality of defence procurement is opened up to the widest market possible, although, as was pointed out, we make clear in certain procurements that we will not entertain bids from certain countries. Each procurement has its operational basis made clear at the outset.

The noble Baroness, Lady Smith, asked whether we will give state aid to suppliers. We have no intention of providing state aid to UK suppliers, which is incompatible with our state aid regime. I am sure she will not be surprised to hear that. Having said that, it is important to understand that there are ways we can alert our home-based industry to forthcoming procurements to enable them to prepare their bids in good time and understand our needs. That process is already under way; we are clear that the entire procurement process needs to be smoother than it perhaps has been. That is not the same as state aid, however.

The noble Baroness also asked whether the Government have modelled the impact of the change on UK defence exports. As I said, defence suppliers will lose their legal rights to participate in procurement in the EU 27, but the quality of our companies should ensure that many EU member states will still wish to entertain bids from our defence industry. As the noble Baroness knows, the UK defence industry participates in co-operative defence projects, such as Eurofighter; that will not change either.

I am sorry to ask the same question over and again, but it is important: putting the derogated areas covered presently by Article 346 to one side, do the regulations—noble Lords must realise that I cannot read them; it took all my time to read the Explanatory Memorandum and try to understand it—require the UK to put non-derogated opportunities to international tender, or is that a matter for the United Kingdom Government’s discretion on a project-by-project basis?

It is important to understand that competition remains at the heart of our approach to defence procurement. Currently, we routinely allow bids from suppliers outside the EU, although the current legislation provides a legal right of access only for suppliers based in EU member states. Where we restrict who can bid in some way—for example, on national security grounds, as I have mentioned—we would make that clear at the outset in the advert or in any pre-procurement documentation.

That position will not change after exit day. Suppliers in the EU and elsewhere will still be free to bid for procurements where no limitations are specified. What is changing is that bidders from the remaining EU member states will not have a legal right to bid for defence contracts; this is the same position as for suppliers currently based outside the EU. I hope that answers the noble Lord’s question.

If the noble Earl will forgive me, I think I follow what he is saying, but I invite him to say whether I have understood him correctly. Because we will no longer be part of the EU procurement regime, we will have no statutory obligation to make these contracts available to bidders from the EU, but we intend to continue to invite applications from those countries. Is he saying that, in practice, for suppliers from the EU—leaving aside those from outside the EU about which we have security concerns—there will be no change in the bidding regime as a result of a no-deal Brexit? If that is not correct, and there will be a change, could he tell the Grand Committee what that change would be?

For UK Government defence procurements, the process from the point of view of an EU supplier will be no different. What it will experience is the need to bear in mind two separate portals or bidding channels; one is the UK e-notification system, which I mentioned earlier, and the other is OJEU. It will need to keep an eye on both if it wishes to participate in the Europe-wide market; in using that phrase, I include the UK as still being a European country, even if not a member of the EU.

The noble Earl says there will be no changes. I understand that at the moment, in non-derogated areas, EU suppliers have a right to bid and we have an obligation to take their bids seriously. I think that under the new situation they do not have this right and that whether they are allowed to bid will be a matter of policy. That policy could change year by year or Government by Government.

That is technically right. It is our policy to maintain access for EU member states—and indeed, non-EU states—in many, if not most, instances of procurement. A good example might be the fleet solid support ships. We invited tenders from all over the world to build those ships and that should provide the best value for money. We all hope that UK suppliers will feel confident in bidding for that contract, but we wish to benefit the taxpayer as well as the Royal Navy and the process will be an open one.

To answer one point which the noble Lord, Lord Adonis, alluded to, there will of course be opportunities to reform the defence procurement rules after we leave the EU. The current rules are generally seen as out of date, compared to the PCR 2015. We have the opportunity to take a fresh look at what is needed for defence procurement—

They are the Public Contracts Regulations 2015. This will involve public consultation to ensure that we strike the best balance between value for money and protecting national security. However, I emphasise that that is a long-term project and does not relate to the regulations before us today.

The noble Baroness, Lady Smith, asked about exit day in the event of a deal. As with the non-defence procurement that we debated earlier, any amendment to exit day as a result of a deal will track through from the EU withdrawal Act to these regulations. Therefore, the no-deal element of the amendments will not come into force.

I hope I have explained clearly the effect of Article 346 and why we have replicated it in the regulations but, just to make doubly clear, it is to ensure we can continue to disapply the procurement rules when required to protect our national security interests. For example, if we did not do so we would be required to advertise our sensitive procurements as a matter of domestic law. In so far as I have not answered noble Lords’ questions I will certainly do so in writing, as for the previous debate, but I hope that my responses have clarified any points of uncertainty.

Motion agreed.