My Lords, we now come on to Part 2 of the Bill. I would like to acquaint the House with my interests in this from my history. In 2008, I was working for Defence Equipment and
Support, and I therefore tend to come at the problems being tackled in Part 2 from perhaps a wider direction than is typical.
At this point, I also thank the Government, particularly the Parliamentary Under-Secretary of State, Philip Dunne MP, the noble Baroness, Lady Jolly, and their civil servants and advisers, for the enormous amount of time that they have given to Peers in general and ourselves in particular in scrutinising Part 2. We therefore have only three groups and five amendments, because we have done all the probing—“What do these little clauses mean?”, et cetera—in those detailed meetings. The way that the Government handled that is highly commendable.
Before we move on to the amendments, it would be useful to pause and look at the problem that we are trying to fix. The Ministry of Defence procures between £6 billion and £8 billion-worth of equipment each year through contracts which are sourced by a single-source supplier. Why does it do this? It does it for the harsh practical reason that, in order to secure sovereignty, it has to cede monopoly. Why does it have to do this? It has to do this because defence technology cannot be this much-dreamed-about, off-the-shelf idea; you need your technology to be at the leading edge, and frequently the only people you can buy leading-edge technology from are your own suppliers. You use your own suppliers to assure security of supply.
The problem with these large contracts is that any vestige of competition recedes as the contract proceeds. The world changes and the Ministry of Defence is left with the harsh choice either to cancel or to pay more. These contracts are also very big. Taxpayers, not unreasonably, often feel that they have got a bad deal. This is compounded by the fact that contracts are frequently obscure and opaque—they are certainly not transparent. I would, en passant, like to commend the Government for the provisions in Part 2 that relate to the reporting regime, which we completely support and believe is an important step forward.
As I say, the people who tend to get blamed for this are the Ministry of Defence, civil servants and serving personnel who work in DE&S. We have to see the size of the problem of managing contracts of enormous size, difficulty and complexity over many years. The Government’s reaction to this was to ask the noble Lord, Lord Currie of Marylebone, to produce a report—which I have read and commend—and to invite a team of civil servants and at least one adviser to produce legislation to address the issue. That legislation is Part 2 of the Bill.
What Part 2 is trying to do is neatly summed up in the provisions referring to the Single Source Regulations Office: the aim is to ensure,
“that good value for money is obtained in government expenditure”,
and,
“that persons … who are parties to qualifying defence contracts are paid a fair and reasonable price”.
That is the objective, and the Opposition commend the Government’s efforts in this area. We support the generality. Part 2 is a good attempt but not good enough. That is why we have three groups of amendments
on Part 2, which will focus on: the independence of the Single Source Regulations Office; the misuse of target cost incentive fees; and the focus on allowable costs.
Amendment 2 relates to the independence of the Single Source Regulations Office, or at least our solution to what we think is not its independence but its apparent independence. It is important to understand how Part 2 works. My interpretation of the way Part 2 works—probably the Government will put me right in a minute or two—is that it puts a straitjacket or constraint or series of rules on how government can behave in these contracts and hence prevent itself by law from being bullied by big suppliers. It is quite a complicated thing to do. You would think, “Well, why don’t you just tell them not to be bullied?”. Of course, in the heat of the moment, when an urgent requirement is coming through, when you have got to do the deal, when it is a matter of national security, it is very difficult to resist the bullying of a big and powerful supplier. The essence of Part 2, as I read it, is to create this framework or the straitjacket that officials will have to work within when they complete these qualifying contracts.
Right at the centre of Part 2 is the Single Source Regulations Office, the SSRO, which has an immensely important role. The two aspects that I would pick out are its responsibility for analysing the data—overlooking the contracts and creating some of the parameters within which they are created—and making rulings. This analysis and these rulings are very significant for the financial impact on the contractor and, conversely, the other side of the coin, on the taxpayer. The SSRO stands between the MoD and the contractor, and its very essence is that not only is it independent but it must be seen to be independent. It is the Opposition’s contention that it is not independent enough and certainly not seen to be independent enough.
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I will constrain myself to proving my points, because we had a very good debate about this in Committee. I commend to anyone who wants to see the sources of the comments that I am going to make—and I do not think that the Government will challenge any of them—the Hansard of the Grand Committee of 25 February. The essence of the issue is that the Secretary of State appoints the non-executive chairman through a process that involves: asking a panel to seek to recruit capable people; from those capable people, the panel determines those who are sufficiently good to do the job; a list of names is then given to the Secretary of State, and he then chooses the chairman. The appointment is within his discretion, once the individuals have passed the appropriate fitness test. He also appoints the other non-executive members of the board; he decides on the reappointment or not of the chairman and the non-executive members; he decides their pay; he approves executive appointments; and he determines the SSRO’s budget. While technically he does not control the pay of its staff, one of the two very useful letters from the noble Baroness, Lady Jolly, on 4 March 2014, says:
“The Bill does not impose any legal constraints on pay for the SSRO employees but, as with all non-departmental public bodies, the Government would expect the SSRO to comply with the relevant Cabinet Office guidelines”.
I ask noble Lords to imagine a situation where they are standing between two very powerful bodies, the industry and the Government. The difference between these two parties is that the individual responsible for the department spending between £6 billion and £8 billion, on which your rulings will have significant impact, appoints you, pays you and decides your budget, whether you are reappointed, who your people are, how big your budget is and, effectively, influences how much you pay people. In my view, this is not sufficiently independent.
We had some debates on this topic in Grand Committee. I commend the noble Baroness, Lady Jolly, on making the unambiguous statement:
“The creation of an independent body is absolutely central to the success and longevity of the framework”.
I could not agree with her more. She made a series of statements to try to make me feel good about it. There was a lovely little paragraph at the end:
“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”.—[Official Report, 25/2/14; cols. GC 330-31.]
What those performance targets are going to look like I do not know. One has a slight, itsy-bitsy worry that the Treasury might have as a performance target, “Try minimising the cost to the Treasury”, which of course would not make it very independent.
An area where I probed a little in Committee was whether the Ministry of Defence was going to put in place any mechanisms to try to put some space between the SSRO and the Ministry of Defence. I do not work in the City, but I will risk the term “Chinese wall” type things. You need to have control of the communications. I posed the question: what would be the characteristics of the communication between the Secretary of State, his staff and the chair of the SSRO, the chief executive officer and the staff of the SSRO? The noble Baroness, Lady Jolly, did not produce a response at the time but went away and carefully thought about it and produced a response in her letter of 4 March 2014. In the letter addressed to me, she said:
“Specifically, you asked if the Secretary of State or MOD staff would be able to communicate with the Chair of the SSRO, or his/her staff. I can confirm that we do not envisage any bar on communication between the Department and the SSRO, indeed, we would see regular exchanges as a positive and constructive development … I suspect that it would be a relatively infrequent event for the Secretary of State to write directly to the SSRO … but I do not accept that such correspondence would be harmful or an indication of the Secretary of State seeking to influence the SSRO unduly”.
The SSRO, we are told, is a small organisation—I got the impression that it would be something like 30 to 50 people. What are they going to talk about, with regard to an organisation of 30 to 50 people, other than the rulings and analysis that the SRRO generates? If your boss talks to you about the rulings you produce, how can that not be a situation in which you do not feel influence?
As if to really cheer me up, the noble Baroness, Lady Jolly goes on—she writes a lovely letter, I must say—to state:
“I suspect”—
not “guarantee”; not “assure”—
“that the Chair will be energetic in defending both the reality and the perception of independence on behalf of the new body in order to underpin its credibility”.
Given the power of the SSRO, I contend that, sat in the MoD with the Secretary of State having this range of powers, it is not sufficiently independent.
We looked at some of the other solutions in government, and there are a variety of solutions, although I did not research them in any great depth. I believe that the Comptroller and Auditor-General of the National Audit Office is appointed for only one term of 10 years, so he is not very susceptible to influence. I think the Governor of the Bank of England was going to be something like eight years, but the new governor said that he wanted only four, or something like that. Nevertheless, there is a mechanism in that Act to give the individual a sense of security. The OBR, I believe, has some mechanism related to the Select Committee. We looked at this range of options but ultimately felt that we should go for a simple option that had already been considered by the noble Lord, Lord Currie, and, as far as I can see, was rejected only because the department in question said that it did not want to do it: putting this organisation in another part of government. Therefore, our recommendation is that the SSRO be placed in the Department for Business, Innovation and Skills.
We have done this because BIS is a big department with experience of regulation. It presently has the Competition and Markets Authority in it—the Office of Fair Trading is morphing into that together with the Competition Commission and the Competition Service. It has this type of experience of balancing regulation. It has some involvement with defence through UKTI. It has tribunal experience. It actually has 49 agencies and public bodies, including the Central Arbitration Committee, the Competition Appeal Tribunal, the Copyright Tribunal et cetera. It has adjudication experience. It is responsible for the Groceries Code Adjudicator. We thought it was a simple solution to recommend that the SSRO be placed in the Department for Business, Innovation and Skills.
The other amendment in this group is Amendment 3, which speaks to Clause 14(7). Here, we just want to put into law the very straightforward assurance that the noble Baroness, Lady Jolly, gave in Grand Committee:
“To summarise, we expect the Secretary of State to use his exemption power only in exceptional cases”.—[Official Report, 25/2/14; col. GC 340.]
I lighted upon Clause 14(7) because it is one of those very typical subsections that government puts in legislation, which, roughly speaking, say, “Notwithstanding the above, the Secretary of State can exempt everything”. We have had an assurance that the exemptions will be exceptional; we would like to put that in the Bill, and we commend that to the House.
We have also had some discussions about exemptions, which were put on the record in Grand Committee. However, a specific set of exemptions were sought by industry, to which the noble Baroness, Lady Jolly, responded in her letter of 19 March. Those exemptions relate to that exemption being used in the case of—for want of a better term—call-off contracts: things which
have a determined external price. That seems to be a perfectly good exemption. Perhaps the Minister could say a little more to reinforce that it will be used in that entirely practical area, which is an area where industry would value a little additional exemption. I beg to move.