The Parliamentary Under-Secretary of State for Defence (Peter Luff)
I am today announcing that Lord Currie of Marylebone is to chair an independent review of the regulations used by the Ministry of Defence (MOD) when pricing work to be procured under single source conditions without reference to competition. The existing framework is described by the Government Profit Formula and Associated Arrangements (GPFAA)—the so-called “Yellow Book”—of which MOD is the sole user.
The GPFAA stems from an agreement between HM Treasury and the Confederation of British Industry in 1968. Operational aspects have been reviewed since that time but successive Governments have left the underlying principles in place. Getting single source pricing right is of great significance to all stakeholders, not least taxpayers: MOD typically places annually around 40% by value of work on this basis.
The formula sets out profit rates allowed as addition to costs, as recommended by the Review Board for Government Contracts; my predecessor announced acceptance of the board’s last report to Parliament on 30 March 2010, Official Report, columns 97-98WS. The GPFAA also includes Government accounting conventions setting out what costs are allowed when pricing single source work.
This review implies no criticism of the Review Board for Government Contracts, which is a valued part of the existing framework and whose remit has been to maintain the profit formula and examine only those issues set before it by MOD and industry.
The defence sector has evolved beyond recognition since the inception of the 1968 agreement. At that time, labour constituted over three quarters of costs in the defence sector. Now it is less than one quarter. The Government owned many more of the assets than we do now. Furthermore, the sector is facing an era of consolidation and restructuring. The Government inherited a fiscal situation that makes it more important than ever that industry is incentivised to reduce costs through the use of modern, fit-for-purpose commercial arrangements (including for small and medium-sized enterprises), additionally making UK industry more competitive on the world market. Therefore, I believe the time is right to carry out this review and have asked that an MOD team, working with the CBI, be established to support Lord Currie’s investigation.
Lord Currie will be consulting widely with other stakeholders and will present his initial recommendations to me by July 2011, after which there will be further consultation with stakeholders to agree an implementation plan, at which time I will report back to the House. In parallel, MOD has requested that the Review Board for Government Contracts continue its work to maintain the existing processes through completion of its 2011 annual review of the profit formula, due to conclude in April 2011, and thereafter until the outcome of this review is known and a way forward agreed.