My Lords, I am pleased to see the noble Baroness, Lady Jolly, in her seat. I would feel inhibited in quoting extensively from her letters, as I intend to do, in her absence. As I mentioned earlier, my vision of Part 2 is essentially that it delivers value by forcing the Government into the constraints that the legislation will spell out once it becomes law. Broadly speaking, what it will do, I hope, is to force agreements into a shape whereby a price is set in one form or another and the excesses or losses that actually occur in practice are handled by Clause 21 entitled “Final price adjustment”. The concept seems to be very sound. You have to go into the regulations to understand it but, broadly speaking, if the actual outturn cost goes up, then pound for pound the contractor makes a loss until the cost becomes excessive, and then, by a formula, the loss starts to be shared with the MoD, eventually on a 50:50 basis. Similarly, if the actual cost goes down because of the efficiency of the contractor, initially all that efficiency and improvement falls to the contractor. Only when the profits start to become excessive is there any clawback to the MoD. It looks to be a good idea that contracts can be forced into that by law. We will wait to see whether that comes off but it is a good aspiration, which we support.
As I mentioned earlier, the Government facilitated extensive discussions on the contract. Of course, when everyone sees a formula, one at least takes some interest in how one would get round it, because that is what people will try to do. As an example, I examined the Statement on carriers made by the Secretary of State for Defence on 6 November in the House of Commons, in column 251 of Hansard. He criticised extensively the previous deal, which was for the carrier but then went on to be a deal which I will call a critical industrial capacity deal. In other words, it was a deal, quite complicated in nature, that essentially paid BAE Systems to do nothing if it had nothing to do in order to retain the essential workforce, facilities and so on. It is a very uncomfortable deal but nevertheless you can see the wisdom of it. Our Government made such deals, this Government have made a similar deal, and despite all the wonderful planning in the world I suspect that future Governments may have to make a similar deal. We agreed with BAE on 6 November.
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Perhaps I may comment on a sentence or two of the statement. Crucially, under the new agreement, any variation above or below that price—£6.2 billion in the paragraph—will be shared on a 50:50 basis between government and industry. That looks like a good target-cost incentive fee, which is the second big way in which the Bill envisages that business will be done. In other words, if the outturn cost is £100 million higher, then government stump up £50 million and BAE loses £50 million profit. If it is lower, the extra profit or surplus is shared 50:50 with BAE. So far so good. However, the next few words are,
“until all the contractor’s profit is lost”. [Official Report, Commons, 6/11/13; col. 251.]
So suddenly the sharing is 0/100. This means that 100% of the excess cost once the contactor’s profit is lost is paid for by government. This does not seem to fit with any of the models in the Bill.
I raised this issue in Committee and the noble Baroness, Lady Jolly, was kind enough to write to me. In her letter she said, “You speculated that although this agreement”—the agreement to which I have just spoken—“deals with an area concerned with single source procurement, deals of this type could not be covered by the new framework and therefore would be exempted under Clause 14(7)”. That is the clause we were talking about earlier which states that the Secretary of State could exclude contracts but, the Government have assured us, only under exceptional circumstances. The letter continues, “Obviously, in this particular case the new framework has not yet commenced and the provisions are not retrospective”. So the new framework will not cover this agreement. It goes on, “Moreover, although this is a very complex agreement covering a range of issues such as redundancies and policies, were a similar agreement to be reached in the future then there is no reason why such an agreement should not be covered by Part 2 of the Bill. There is no expectation that it will be exempted under Clause 14(7). The principles underlying Part 2 would be as relevant in the application of such an agreement as any other single source contract between MoD and industry”. That is great. That is good. In future we are going to work within the limitations of the new framework.
At a subsequent meeting I said that that was a great assurance but how do we accommodate the point where the deal just concluded goes into a sharing of 100 per cent of the losses being picked up by government and 0% of the losses above that point being the responsibility of BAE Systems? The Government drew breath and said that they would write again. When they wrote again the letter stated, “As I explained to you in my last letter, our initial assumption is that in future any single source contract negotiations will be on the basis that the resulting contract will be a qualifying defence contract as defined in Part 2 of the Bill. It is also our assumption that the Secretary of State will only be required to use his exemption powers on very rare occasions. We do accept that there may be situations, such as where there is a very large element of risk involved in a major project, where it makes sense for the MoD to accept the potential liability for a larger proportion of the costs. In this case, however, there will no requirement to invoke the Secretary of State’s exemption powers. Clause 16”—which is the subject of this debate—“provides the department with the flexibility to make target-cost incentive fee arrangements with industry, allowing us to specify arrangements where we share a greater proportion of potential gains and losses than is the case under the final price adjustment”, which I have previously described.
I do not know about your Lordships, but “target-cost incentive” means that there is an incentive. Every pound that you lose, being wholly paid for by the Government, does not seem to be an incentive at all. This seems to be a complete misuse of Clause 16, which was designed to keep an incentive on the contractor throughout the contract to the very end. I cannot claim that use of this clause in this way is contrary to the wording, but I do claim that it is contrary to the clause’s intention, which was to create a framework for a target-cost incentive fee arrangement—in other words a proper incentive running all the time.
I believe that the use of this clause to legitimise a large and complex deal, whereby all losses are picked by government, is an improper argument. We support the generality of this Bill, but I would like to hear what the Government will do about the use of this clause, which will allow a coach and horses to be driven through this otherwise well crafted part of the Bill; we believe that that is wrong. We would like to hear what the Government are going to do about it and that is why we have put forward this amendment that the clause be deleted. I beg to move.