My Lords, I will consider Amendments 18J and 18K together and then move to the clause stand part debate.
These amendments relate to the Secretary of State’s power to exempt contracts from the new framework, provided for by Clause 14(7). Amendment 18J has no impact in its own right other than to add scope for a limitation to the Secretary of State’s exemption power. That limitation is provided by Amendment 18K. Subsection (7) gives the Secretary of State the power to exempt individual contracts that would otherwise be subject to the new regime. While it is not possible to foresee all future circumstances, this power is considered necessary for a number of reasons.
Before considering the limitation introduced by Amendment 18K, it might be helpful to noble Lords if I outline and give examples of the key circumstances in which we expect this power to be used. The first circumstance is where there is no market failure. The framework addresses the situation where a contract
price is not subject to the competitive pressures of the market. If those pressures are evident in the contract price, the framework is not required. An example is the purchase of additional items that are readily available in the civil market, such as computers. To ensure compatibility with our existing infrastructure, we might want to use a particular manufacturer, so the procurement would be a single-source procurement. However, the item might have a price that has been established in a competitive market. In such cases, there would be no requirement for standardised reporting and open book rights to ensure value for money, because it would be self-evident from the marketplace. Applying the framework in such a case would not represent value for money, as the additional costs of making the contract a regulated contract would not be outweighed by the benefits of transparency.
4.30 pm
The second circumstance is national security. The Bill provides for some categories of contract to be excluded from the framework automatically, and Clause 14(2)(c) provides for these categories to be specified in the single-source contract regulations. The draft regulations identify a few such categories, one of which is when a contract is for the purposes of intelligence activities. We intend that these exclusions will apply only if the whole contract is covered by one or other of the excluded categories. So in the case where a significant part, but not all, of the contract is for intelligence activities, the contract would not be excluded from the framework automatically. Since transparency is a significant part of the framework, this is unlikely to be appropriate, so the whole contract may require exemption by the Secretary of State.
The third circumstance concerns our relations with other nations. Transparency is one of the key elements of the new framework, and some of the standard reports would give us sight of a supplier’s plans for the key industrial sites sustained by MoD’s single-source procurement. We require that information so that we can monitor planned investment or disinvestment activity and compare it with our forecast capability requirements. However, that could result in a supplier having to reveal the forecast throughput assumptions of facilities that are predominantly used by a foreign Government, which could expose that country’s defence planning assumptions to our gaze. Needless to say, that is likely to be treated with considerable reluctance by the foreign Government.
In such a circumstance, we might expect a contractor to use the provision of Clause 27, identifying a “relevant restriction” over such information. However, this possibility applies only after the contract has been entered into, so the contractor and foreign Government may not be willing to rely on this provision. We would therefore first consider using the lesser exemption provided by Clause 25(8), which provides specific exemption from such reports while leaving in place the pricing and contract-specific reporting provisions. Despite all this, a complete exemption using the power under Clause 14(7) may still be required should the other measures not be sufficient to satisfy the concerns of a foreign Government.
Without the power to exempt individual contracts, the MoD could find itself in the uncomfortable position of having to choose between not being able to procure certain equipment or applying the framework in circumstances that do not provide value for money, risk the security of sensitive contracts or risk trying to force a supplier to provide information against the wishes of another Government. These situations are expected to be rare, but this is an essential power for the effective operation of the framework.
To summarise, we expect the Secretary of State to use his exemption power only in exceptional cases. The new framework will help us to get value for money, so we have no desire to limit its application, except where there is no market failure to correct, or it would be impractical.
To return to the amendments, we do not see a need for additional and specific parliamentary scrutiny over the use of this power. It will be subject to normal processes, as with other powers granted to a Secretary of State, and his decision to apply the exemption will ultimately be subject to judicial review. Where we are using the exemption for national security reasons, or where we judge that it would be potentially damaging to foreign relations if we did not exempt a contract, there may also be reasons why we do not wish to have a public and high-profile debate on the matter. I hope this explains our position, and I therefore urge the noble Lord to withdraw the amendment.
Clause 25 is about reports. The new supplier reports defined in it are a fundamental component of the new framework, and a very significant amount of the benefits case for these changes rests on the use that will be made of the reported information and the analysis that will be derived from it. This clause is therefore vital to the overall function of the new framework.
The new reports will provide the MoD with much greater transparency over the assumptions suppliers have made in proposing the cost-recovery rates that form such a vital component of the price in large single-source contracts. This transparency will allow us to understand much better the effectiveness of those agreed rates as a mechanism used to recover suppliers’ allowable overhead costs, estimated in total to be £2 billion pounds each year. Analysis of new standard-format cost data will enhance our ability to benchmark the business units we do business with, and better challenge costs we are asked to pay for in an objective and analytical way, backed by evidence. The requirement for all companies to provide information in a standardised way will enhance the MoD’s ability to compare and contrast costs and recovery rates though time, between business units and suppliers, and also against externally published data for both the defence sector and the wider industrial landscape.
Finally, the new reporting requirements will promote and inform very senior dialogue between industry and government around better alignment of long-term supply and demand, attempting to ensure that the MoD contributes only towards the maintenance of industry capacity it reasonably expects to need in the future. Most of the information in these reports will be available to commercial teams
responsible for contractual negotiations and also to MoD project, finance, planning and cost-assurance teams.
Overall, when fully implemented and matured, the new reports will make a substantial contribution to making the MoD a more intelligent and informed customer. Over time, the information provided by the new supplier reporting requirements will make a very real end-to-end contribution to the process of agreeing, using and validating cost recovery rates and, in turn, where appropriate and justified, this will lead to lower contract prices. This clause, which enables the creation of these critical reports, will significantly improve the understanding and transparency of the costs the MoD has to pay and help us to become an even more intelligent customer.
To address some of the noble Lord’s points on the exclusion of government-to-government contracts, these contracts are already excluded by the single-source contract regulations under Clause 14(2)(c). The exemption power of the Secretary of State will not be used for these contracts. I have a lengthy response on transparency over strategic capability, and it is probably better if I set it down in a letter to the noble Lord; it runs to one and a bit pages. If the noble Lord is happy with that, I would be grateful if he would withdraw his amendment.