My Lords, a substantial proportion of the MoD’s annual procurement spend, amounting to some £8 billion a year, goes on single-source contracts. Given this level of expenditure, it is critical that the department obtains value for money. It is also critical that we protect the long-term future of the defence industry by ensuring that suppliers get a fair return on single-source work.
When the noble Lord, Lord Currie, produced his independent report on non-competitive defence procurement in 2011, he concluded that the arrangements then in place were simply unfit for purpose. The result was a weak negotiating position for the department and poor value for money for the taxpayer.
Following the noble Lord’s report, in 2014 we introduced a new framework as part of the Defence Reform Act. Our intent was clear: the new framework sets out firm rules on pricing single-source defence contracts and puts the onus on suppliers to demonstrate that their costs are “appropriate, attributable and
reasonable”. Where there is a dispute, either party can refer the matter to an impartial adjudicator, the Single Source Regulations Office, for a decision.
Since coming into force in December 2014, the new framework has made considerable progress: more than £19 billion-worth of single-source contracts have been brought under the framework, and the benefits to the MoD have been significant.
However, any new regime of this complexity needs to be refined in the light of experience. The Act therefore requires the Defence Secretary to carry out a thorough review of single-source legislation within three years of the framework coming into force. This review was completed in December 2017 and several proposals were identified as potential improvements to the framework. We have incorporated the first of these into the SI under consideration, but we plan to introduce further amendments later in the year.
The main amendments under consideration here relate to those types of single-source contract, known as “exclusions”, which cannot become qualifying defence contracts. Experience in implementing the framework has shown that there is some confusion about how such exclusions are applied and that some contracts, relating to intelligence and international co-operative programmes, are being unnecessarily excluded. We therefore propose a clearer and more precise definition of these two categories.
We are also adding a further category of exclusion to deal with situations where contracts are transferred from one legal entity to another, such as where an internal restructuring of industry has taken place. In such cases, although the legal identity of the supplier may have changed, the contract itself has not otherwise changed in a material sense.
We have engaged extensively in drafting these amendments and believe that the proposals will be generally welcomed by suppliers. I beg to move.