My Lords, I thank noble Lords for their comments at the beginning of this fourth day in Committee. In particular, I thank the noble Lord, Lord Tunnicliffe, and commend him for his preparation for the scrutiny in this Committee stage. I apologise in advance to noble Lords because some of my earlier speaking notes are quite lengthy, but they get shorter. The purpose of the length is that we need much of this on record.
Clause 13 is at the heart of the reforms to single-source procurement. It establishes the Single Source Regulations Office, a small, arm’s-length body responsible for keeping the new framework under review, monitoring adherence and providing expert determination between the MoD and single-source suppliers. It is therefore essential to the success of these reforms. Clause 13 also establishes in law the overriding aim of the SSRO to assure that good value for money is obtained in government
expenditure on qualifying single-source defence contracts and that defence suppliers are paid a fair and reasonable price under those contracts.
The creation of an independent body is absolutely central to the success and longevity of the framework. I cannot say this too strongly. The purpose of this body is to be independent and transparent, thus giving confidence to both parties who need to play in this area. It was a key recommendation of the independent review conducted by the noble Lord, Lord Currie. The SSRO will replace the existing Review Board for Government Contracts, which, as the noble Lord, Lord Currie, identified, has, through no fault of its own, failed to evolve to reflect changing circumstances, largely because either party can block any change that it regards as contrary to its own interests.
Clause 13 brings into effect Schedule 4, which establishes the governance structure of the SSRO. In this we have closely followed guidance published by the Cabinet Office on executive non-departmental public bodies and have considered existing governance arrangements for similar bodies, such as Monitor. So we have not started with a blank piece of paper and, as the Committee will see, with the following key characteristics of the SSRO, the structure we have created is in common with other similar public bodies. It has a separate chair and chief executive and a board which has a majority of non-executive directors, which is aligned with best practice in the Financial Reporting Council’s UK Corporate Governance Code and Cabinet Office guidelines. Non-executive members of the SSRO should be appointed for a period of between three and six years to assure a staggered process of appointments to the key positions. There will be a process that allows the Secretary of State to remove or suspend a member from office on the grounds of failure to carry out his or her duties, incapacity, such as ill health, or misconduct, which rightly follows Cabinet Office guidance on the creation of public bodies. The SSRO will have the ability to appoint its own employees, which is consistent with Public Bodies: A Guide for Departments, produced by the Cabinet Office; and, in accordance with the Cabinet Office’s guidance on good corporate governance in executive NDPBs, the SSRO’s committee structure will be the body that makes key binding determinations, including where there is an appeal from one of the parties to a qualifying defence contract. We have listened to industry requests in this area, and have agreed that committees can contain members who are not employees or members of the SSRO.
The SSRO will also have separate responsibilities to the Secretary of State, the Auditor-General and Parliament. These, which are set out in Schedule 4, include the provision of annual accounts which are consistent with international finance reporting standards, which will be audited by the National Audit Office. These accounts will be prepared between three to six months of the end of the financial year. An annual report on its activities must be provided by the SSRO to the Secretary of State, who in turn will lay the report before Parliament.
As the sponsoring department of the SSRO, the Secretary of State will make payments to the SSRO to finance its operations. This is in common with Cabinet
Office guidance on the funding of ENDPBs. There will be a framework agreement established between the MoD and the SSRO that sets its budget, in accordance with HMT’s guidelines in Managing Public Money and performance targets. The SSRO will be jointly funded by the MoD and industry, but we have agreed with industry that the MoD will pick up its costs over the first three years, as it is established and until we determine its precise annual running costs. The SSRO will be allowed to borrow money only on a temporary basis up to an overdraft limit set by the Secretary of State. There may be occasions where the SSRO has a higher number of adjudications or determinations that it is administering, where it may require additional resources to meet its objectives in a timely fashion.
We have given the SSRO the ability to pay pensions to its non-executive members. This is not because we intend to pay a pension to every non-executive member the SSRO appoints; rather, we have done this to give the Secretary of State the flexibility to recruit non-executive members from both the private and public sectors who may have existing pension arrangements. Other elements of Schedule 4 ensure that the SSRO will be a body that is subject to the Freedom of Information Act 2000, allow the parliamentary commissioner to investigate the SSRO, and ensure that its staff are not civil servants.
This clause is therefore crucial to the overall establishment of the SSRO and the functioning of the new framework. The SSRO will, over time, become an independent expert in defence single-source pricing, ensuring that we do not need to wait another 45 years for this framework to be reviewed again. It is therefore crucial that this clause is retained in the Bill.
Amendments 18G and 18H revolve around a concern, primarily expressed by industry, but also by the noble Lord, about the independence and impartiality of the SSRO. I assure noble Lords that we are committed to ensuring that the SSRO will be both independent and impartial. The credibility of the new single-source framework rests upon this. For example, the SSRO can act as an independent adjudicator in the event of disputes between parties and it is the appeal body to which industry can refer if we apply a civil penalty to it. Perhaps even more significantly, it annually recommends the profit rate and recommends changes to the framework as part of the quinquennial review process. It is the guardian of the new framework and its impartiality is at the core of the dual aims under Clause 13 of ensuring a fair and reasonable price for contractors and value for money for the Government.
If the SSRO was perceived as being partial, this would create great difficulties. If the perception was that it was too biased towards the Government, shareholders could decide that the defence sector was no longer worth investing in and our suppliers could be driven to leave it. If the perception was the other way—as too biased towards our suppliers—we would seek to change the framework entirely or we would exempt our contracts from it and thus lose the protections we are establishing in this Bill. Neither of these outcomes serves either the MoD or our single-source suppliers. It is the need for independence and impartiality that has led to our desire to set up the SSRO in the first place. The current framework requires consensus to
change. This has meant that for 45 years, any change that one side has felt puts them at a disadvantage has been blocked. This is the principal reason why the old system has remained frozen in time for so long. Consensus will not serve us. The alternative, a statutory framework determined entirely by the MoD, would always be resisted by industry. There would be a risk that over time the framework would become steadily more one-sided and that industry would be driven out of the sector, so this option is also not desirable. What we need is an independent body, namely the Single Source Regulations Office.
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Industry representatives have looked at some of the provisions of the Bill, which have given them some concerns that the SSRO will not be independent. Specifically, they have pointed to the fact that the chair and other non-executive members are appointed by the Secretary of State. They consider that this gives the Secretary of State considerable leverage over the SSRO. There are reasons for this process, and they do not stem from a desire to exert influence over the SSRO. We looked at the different models for arm’s-length bodies. We wanted to give the SSRO as much freedom as possible, including the ability to recruit its own staff. We did not want the SSRO to be a servant or an agent of the Crown and thus subservient to Ministers. These requirements have led to it being designated a non-departmental public body.
There has been considerable attention on NDPBs over the past few years, and one of the aims of this Government has been to reduce their number. In this case, the SSRO will be replacing an existing NDPB, the Review Board for Government Contracts, which through no fault of its own has not had the power to amend the current framework. However, noble Lords will be aware that there is substantial guidance around non-departmental public bodies. For example, they must be sponsored by a department which, given the functions of the SSRO, in this case is the MoD, and the Secretary of State of that department must appoint the chair and non-executives of the body. I think that that answers the question put by my noble friend Lord Palmer. The independence of the chair and the other non-executive members is essential, so forgive me if I now describe the recruitment process in some detail.
To ensure that this appointment will result in a suitable independent and unbiased person, we are running the recruitment process in full accordance with the guidelines of the Office of the Commissioner for Public Appointments. All the posts will be publicly advertised, with public selection criteria. The recruitment process for the chair is already well under way, with interviews for the post held within the last two weeks. The recruitment panel for the chair is headed by a public appointments assessor chosen for us by the Office of the Commissioner for Public Appointments. The panel has reviewed and cleared the advertisements, the selection criteria and the recruitment strategy. Also on the recruitment panel is a second independent person suggested by the Office of the Commissioner for Public Appointments and approved by the public appointments assessor. There are also two others on the panel, one MoD official and another person who
has been suggested by industry, namely Paul Everitt, the chief executive officer of ADS, which is one of the industry trade bodies for the defence sector. Only one of the four members of the interview panel is from the Government.
The interview panel’s selection of suitable candidates will now be reviewed by the Secretary of State, who may not add candidates to or remove them from the shortlist, or appoint a candidate not assessed as appointable.
The same recruitment panel, with the addition of the chair once appointed, will be used to select the other non-executive directors. There are additional requirements on suitable candidates. They must not have recently come from the MoD or a defence supplier. They must represent a balance of private and public sector experience, and they must have a variety of relevant experience—for example, legal, regulatory and private sector acquisition. Once appointed, the non-executives will appoint their chief executive officer and chief operating officer. Together, the board will then appoint what staff it needs.
This is a rigorous appointment process, and I am confident that the result will be an independent SSRO board. I do not think adding the need for the appointment of the chair and other non-executive members to be ratified by the House of Commons Defence Select Committee is a necessary additional step. The process of pre-appointment approval by Select Committee was introduced in 2007, and there has been discussion between the Government and the House of Commons Liaison Committee over which posts should be subject to such approval. Ultimately, it should be a matter for agreement between the Secretary of State and the chair of the Select Committee, and no such direction has been made for this post.
The SSRO is, for the most part, free to determine its own procedures, including making committees, which is the subject of the next amendment. The exceptions to this are where its procedures are laid out in the Bill or in the SSRO framework document with the MoD. This will, for example, require it to run a full public consultation in support of the quinquennial review.
All of this points to the considerable efforts we have made to ensure that the SSRO will be independent. The fact that the Secretary of State appoints the chair is not what will determine the independence and impartiality of the SSRO. It is its statutory aims, namely to balance the interests of value for money and a fair and reasonable price. It is the recruitment process of the chair and board, which I have just explained in some detail. It is the nature of its functions, which are set out in the Bill, and it is its freedom to determine its own processes and recruit its own staff. Finally, it is the checks and balances that the SSRO, like all public bodies, is subject to—for example, the Competition and Markets Authority and the National Audit Office. It is the fact that the SSRO’s chief executive officer will be an accounting officer, and that its chair can be brought before a parliamentary committee at any time.
Amendment 18H, the second in this group, also revolves around the independence and impartiality of the SSRO. Paragraph 10 of Schedule 4 to the Bill
requires the SSRO to appoint a committee for the purpose of making any opinion or determination in response to a referral, and that such a committee must consist of three people, at least one of whom must not be a member or employee of the SSRO. Determinations are to be made on a majority basis, and this amendment would require that a majority of the committee must not be members or employees of the SSRO. In effect, this amendment would increase the number of committee members who must be external to the SSRO from at least one to at least two out of three.
I note that the current drafting does not prevent a majority, or indeed all, of the members of the committee being external to the SSRO should that be appropriate, for example to assist with capacity or specific additional expertise. Since no amendment is necessary to allow a majority of the committee to be appointed externally to the SSRO, I assume that the intent of this amendment stems from an underlying concern that the SSRO itself will not be an impartial body. I will return to this.
Matters that may be referred to the SSRO are almost all of a technical nature. The SSRO, as guardian of the framework, will hold an expert understanding of the issues that are brought to it, and an appreciation of the broader context of the framework within which the referral sits. It will be bound by its statutory aim of ensuring a fair and reasonable price and value for money. For these reasons, we consider the SSRO to be best placed to make these technical determinations. Indeed, it is one of the primary functions the SSRO is being created to fulfil.
Industry has, throughout our engagement with it over the past two years, continued to express its concern over independence and impartiality. I have addressed much of our response to this concern in my comments on the previous amendment, and while we understand the concern, we do not share it. The existing requirement that at least one member of the committee be external to the SSRO was specifically introduced in response to industry’s concern over the impartiality of the determination committees. For the many reasons already discussed, we believe that the SSRO will be independent and impartial. In the unlikely event that a committee displays partiality, the independent member of the committee may raise a red card. In the extreme, they could remove themselves from the committee, making it no longer quorate. We consider that this is sufficient to address that concern. Beyond addressing the perceived impartiality of the SSRO, we consider that requiring a majority of the committee to be external to the SSRO will be to the detriment of the efficiency and effectiveness of the SSRO’s function to provide expert determinations, without any change to the committee’s impartiality.
Requiring another member to be external to the SSRO will increase the cost of the committee as such external members would be expected to be more expensive than members or staff of the SSRO. It may reduce the experience and understanding of the technical framework under Part 2 that will be available in the committee’s deliberations. It is likely to impact on the effective governance of these committees as the pool of suitably experienced and qualified experts with an understanding of this technical framework is expected to be relatively small, so there may be delays in establishing committees
and in their deliberations owing to the external commitments of members. Finally, all members of the committee, whether internal or external, will still be appointed by the SSRO chair. Unless we make the assumption that members and employees of the SSRO, who are subject to its dual statutory aims, are somehow less impartial than external appointees, there is no benefit to increasing the number of external appointments.
For all these reasons, we do not consider that this amendment is necessary and believe that it will reduce the effective operation of the SSRO’s function to provide independent and impartial determinations.
I shall move on to points made by noble Lords. The noble and gallant Lord, Lord Craig, asked about the independence of the SSRO from the Treasury. I will write to him to give him more detail on that.
The noble Lord, Lord Tunnicliffe, asked several questions. This may well repeat some of what I have already said, so please bear with me. Three of four on the appointment panel are non-MoD.The chair can be required to appear before parliamentary committees. We are well aware that the independence of the SSRO is still a subject of concern. I assure the Committee that the Government are committed to ensuring that it is impartial. If a new system is perceived as too biased towards the Government, suppliers could decide that they no longer wished to invest in the sector or in the industry altogether. If the perception was the other way around—that the system was too biased towards industry—we would seek to change the framework entirely.
On what the board does versus what must the committee do, the matters listed in paragraph 10(3) of Schedule 4 are inexplicable on their own, but I am sure the noble Lord has cross-referenced them to understand what they do. They are what must be done by the committee, but they apply only to referrals, determinations and opinions. They ensure the use of an independent person for the key decisions.
In response to the question put by my noble friend Lord Palmer, about whether the SSRO’s sponsoring body should be BIS, there is a requirement across government that all non-departmental public bodies should be associated with a specific department and that the Secretary of State for that department must approve the relevant board appointments. The functions being assumed by the SSRO are of most pressing interest to the MoD rather than any department. They are specialised in nature and require technical understanding of the specific nature of single-source procurement as undertaken by the MoD. No other government department has used the Yellow Book arrangements for many years, and therefore at the current time it would be impracticable to consider any department other than the MoD as the sponsor of the SSRO. With that, I urge the noble Lord not to oppose the clause standing part of the Bill.
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