Grand Committee

Monday 3rd February 2014 Grand Committee

Monday, 3 February 2014.

Defence Reform Bill

Monday 3rd February 2014 Grand Committee

Committee (1st Day)

15:30

[The Deputy Chairman of Committees (Lord Geddes) (Con)]

My Lords, as is customary on these occasions, I must advise the Grand Committee that if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells ring and resume after 10 minutes. Before calling Amendment 1, I must advise your Lordships that there is a mistake in the Marshalled List. The amendment should say, “Page 1, line 10”, not “line 9”.

Clause 1: Arrangements for providing defence procurement services

Amendment 1

Moved by

[Lord Rosser]

1: Clause 1, page 1, line 9, after “DE&S,” insert “subject to conditions on maintenance and upkeep set by the Secretary of State,”

[Lord Rosser (Lab)]

My Lords, I should like to talk first about the amendment before progressing to brief comments on Amendments 2, 3, 4 and 5. Clause 1(1) provides for the company providing defence procurement services or,

“another company … to acquire from the Secretary of State rights in or over premises and property used for the purposes of”,

defence equipment and support. Under what circumstances might that involve a company other than a company providing defence procurement services? The Bill makes no reference to conditions on maintenance and upkeep. It would be helpful if the Minister were to indicate the key conditions that would apply to the company concerned, bearing in mind that the premises will continue to be owned by the Government and that the defence procurement service operation could, in certain circumstances, be transferred back under complete government control.

Will the Secretary of State be continuing to oversee the upkeep of the premises, and would it be the Secretary of State or the company concerned that would renegotiate any rental or leasing of goods, equipment or property transferred under this clause? Will it be open to the company concerned to rent or lease out property acquired under subsection (1)(b)(i) that is not being rented or leased out at the time of acquisition? Will the new government trading entity responsible for DE&S from April this year be operating under arrangements in respect of property and premises similar to those intended under subsection (1)(b)(i), and, if not, what will be the arrangements in respect of property and premises that will apply to the new DE&S organisation?

Amendments 2 to 5 stipulate action that has to have been undertaken or requirements that have to be met before the arrangements for providing defence procurement services can be brought into force. The Bill appears to be largely silent on these matters. Amendment 2 requires the Secretary of State to publish guidance on the operation of the GOCO contract, which has to include,

“the system by which available defence contracts will be advertised”,

an issue of some importance, not least to small and medium-sized enterprises. Amendment 2 also puts a responsibility for operating the GOCO contract,

“to produce and report annually against progress on an export strategy”.

At the moment, we do not know—and neither do potential bidders—how available defence contracts will be advertised. This is an area in which transparency and openness is essential if we are to provide a level playing field for those interested in bidding. Perhaps the Minister can also say if the move to a bespoke, central government trading entity from April this year will or could lead to a change in how contracts are let or advertised, bearing in mind that we are to see the introduction of a significant element of private sector support.

Likewise, the extent to which equipment to be used by our Armed Forces can also be sold to other countries is an important aspect of our export strategy, and makes a valuable contribution to our export earnings. Such exports also provide us with important links, influence and contacts with other countries and their armed forces. If there were to be a change in our defence procurement arrangements, we need to ensure that an outside company operating a GOCO contract is mindful of the importance of defence exports and continues to give this area of activity the priority it needs. Perhaps the Minister can say whether the setting up of a DE&S as a bespoke central government trading entity from April, with new freedoms, flexibilities and private sector support, will or could lead to any change in approach as far as the potential for defence exports is concerned.

Amendments 3 and 4 provide for contractual obligations to be placed on the company operating the GOCO contract under subsection (2), specifically including provision to prohibit the sale of financial securities in any publicly listed company appointed under subsection (2) where such sale would result in a change of majority ownership; a provision to require non-UK companies to establish special security arrangements for the operation of the contract; and provisions to disqualify certain categories of individuals, as stated in the amendment, from a directorship of the company operating the GOCO. Amendment 5 defines special security arrangements, as referred to in proposed subsection (7A)(a) in Amendment 4.

The purpose of Amendments 3 to 5 is to draw attention to the possibility of unacceptable foreign influence over British defence interests as a result of the GOCO operation, with the private sector involvement and the consequential issue of the ownership or possible change in ownership of one or more of the companies concerned. There is also the issue of possible conflicts of interest at director level and how that will be addressed or avoided, and that is the subject of Amendment 4.

I am sure that the Government are more than aware of the significance of these issues, and I hope the Minister can say something about how they would have been addressed had the GOCO option been pursued. It would also be helpful if the Minister can say how these issues will be addressed in DE&S organisation from April, with its newly significant element of private sector support and its separate governance and oversight structure.

[Lord Palmer of Childs Hill (LD)]

My Lords, the noble Lord raises some interesting points, which the Government should take cognisance of. However, I ask those who tabled the amendment and the Minister whether these issues should be included in primary legislation. I jotted down the noble Lord’s points as he spoke. He spoke about the premises, and he raises important points, but those are points you deal with in contracts, when you have a lease—whether it is a repairing lease or not. It is not something one would expect to see in primary legislation.

The noble Lord talks about export strategy and the importance of defence exports. I could take this even further: the Ministry of Defence, which is very much involved in defence exports, should also be working closely with the Business Secretary to promote exports. Very often they operate in their own silos rather than together. However, that is not something which would appear in primary legislation.

The noble Lord also talks about foreign influence over defence interests, and I hope the Minister will respond to that point; however, again, it is not a matter which needs to be addressed in primary legislation. I await my noble friend’s answers to these questions but I think they are matters for regulation and secondary legislation rather than being in the Bill.

[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever) (Con)]

My Lords, these amendments have enabled the Committee to have a debate on Clause 1. As has been identified, Clause 1 is the key clause in Part 1 of the Bill, and it is important that we consider it in detail, because it will enable the Secretary of State to contract with the company for the provision of defence procurement services, should that be the way forward that is eventually agreed. It is also the clause on which most of the rest of Part 1 hangs. The amendments we will be discussing today have highlighted some very important issues and the reasons behind them have been clearly and comprehensively covered by the noble Lord, Lord Rosser, and my noble friend Lord Palmer of Childs Hill.

Amendment 1 relates to the GOCO acquiring rights over the premises and property used by today’s Defence Equipment and Support organisation and ensuring that assets are properly maintained and managed. I agree with the intent behind this latter point as it recognises the importance of ensuring that effective arrangements are in place to ensure that any such assets continue to be properly managed. Clause 1(1) specifically makes it clear that the provisions within Part 1 of the Bill will apply only when three clear conditions have been met. The first condition is that the Secretary of State makes arrangements with a company—in other words, the GOCO—for the delivery of the defence procurement services currently undertaken by DE&S within the Ministry of Defence. The second condition is that the GOCO acquires from the Secretary of State rights in or over premises and property used by DE&S. The third condition is that the GOCO becomes the employer of some or all of the civil servants employed by DE&S immediately before the company becomes their employer.

It is our intention that, although the GOCO will be given the right to use existing DE&S property, the ownership of the assets themselves will not change. In the vast majority of cases this means that ownership will continue to lie with the Ministry of Defence and the management of the assets will be the responsibility of the Defence Infrastructure Organisation. Amendment 1 seeks to make the acquisition of rights over existing DE&S premises and property by the GOCO,

“subject to conditions on maintenance and upkeep set by the Secretary of State”.

However, although I fully support the intent behind the amendment it is simply not required as the issue will be more effectively and better addressed in the contract between the GOCO and the MoD and on a case-by-case basis in the individual leases or agreements.

The premises and property occupied by the GOCO will remain the property of their existing owners, which in the majority of cases will be the Ministry of Defence. The GOCO’s rights and obligations in respect to using these assets will be agreed with the MoD and set out in the GOCO contract and the relevant lease or agreement. This will include conditions on maintenance and upkeep, as normal in a commercial contract or lease. The Defence Infrastructure Organisation within the Ministry of Defence will continue to be accountable for the delivery of infrastructure services, maintenance and upkeep. However, in some cases it is possible that responsibility may be contracted to the GOCO in due course. In conclusion, although the amendment raises some excellent issues, I must resist it for the reasons I have just set out.

I turn now to Amendment 2. Its purpose is to prevent the Secretary of State commencing the establishment and operation of a GOCO under Part 1 of the Bill until he has published guidance on the operation of the contract. In particular, the amendment proposes that this guidance should include the system by which available defence contracts will be advertised to potential bidders and how any follow-on GOCO shall produce and report annually against progress on an export strategy. The amendment seeks to address concerns raised during the oral evidence sessions in the other place about a possible lack of visibility on how the contract will work, particularly in relation to how defence contracts will be placed, and about ensuring that the new GOCO pays sufficient regard to wider defence industrial policy issues, such as the exportability of equipment. The concern was that the GOCO would be focused solely on delivering equipment more cheaply and would not have to take into account other aspects of our industrial policy.

It is our intention that the GOCO will act as the Secretary of State’s agent when contracting for defence equipment and support. This means that the Treaty on the Functioning of the European Union, the Public Contracts Regulations 2006 and the Defence and Security Public Contracts Regulations 2011 will apply in the same manner as they do today. This includes advertising in the Official Journal of the European Union where required. MoD commercial policy on advertising defence contracts will also continue to apply. In addition, it is to be remembered that any contract entered into by the GOCO to deliver defence equipment, support, logistics and services will be entered into by the GOCO as agent on behalf of the MoD, which will remain a counterparty to defence contracts.

It is also our intention that the strategy for wider defence industrial policy and exports remains with government, but supported by the GOCO providing defence procurement services under contract, including providing support to government marketing of defence materiel at defence exhibitions and shows; managing the provision of defence assets and resources to support defence export opportunities, including assistance with export licence applications; and providing recommendations to government on export strategy and policy, a point that the noble Lord raised. The GOCO will therefore not be required to have its own exports strategy and the amendment is therefore not required.

15:45

The purpose of Amendment 3 is to prohibit the sale of financial securities in the GOCO if the GOCO is a publicly listed company, when such sale would result in a change of majority ownership. The amendment deals with a perfectly understandable desire to protect national security arising from the concern that, although we might be content with the companies we contract with initially, we must control those companies subsequently selling their stake to other less desirable companies with national security implications. I understand these concerns and agree that these risks need to be effectively managed.

It is our intention that the GOCO will be prohibited from selling financial securities through contractual provisions in the contract with the GOCO managing company and through the operating company’s articles of association, which will be agreed as a condition precedent to the contract. It is our intent that these provisions will also apply to any new arrangements—for instance, on expiry of the original contract with the GOCO.

The structure of the GOCO proposal and its associated operating model are not new and have been tested elsewhere in industry both in the UK and overseas. One such example, which also includes provisions on managing share ownership, is the Atomic Weapons Establishment.

In conclusion, the amendment is not required because, although the underlying concern is fully appreciated, it does not recognise the complexities of change of ownership and sale of financial securities in the context of the proposed contracting structure either now or in any new arrangements. These complexities can best be dealt with in contracts that can be drafted and negotiated to meet specific requirements. There is no necessity for a legislative provision to address the concern.

The purpose of Amendments 4 and 5 is twofold. First, they seek to put in place additional security arrangements should the contractor be a non-UK company. Secondly, they seek to disqualify from the directorship of the GOCO any individual who is involved in the provision of defence equipment or services in any other company in the defence industry. I would like to reassure noble Lords that, although we have concluded that these amendments are not required, it is because extensive, effective checks and balances are either already in place or will be put in place within the GOCO contract and that the risks in question are already, therefore, being effectively managed through more appropriate means.

The amendments also seek to ensure that the GOCO cannot take advantage of its privileged position to exert influence over British defence interests and to prevent the company’s directors, whether or not it is UK-registered, having conflicting interests in other defence companies. Amendment 4 seeks to make it necessary for the GOCO to include a number of mandatory obligations on the contractor. The first requires that non-UK companies must establish “special security arrangements” for the operation of the contract. Amendment 5 provides a definition of “special security arrangements” as,

“a proxy board or special security agreement set up to prevent foreign influence over British defence interests”.

The second and third obligations seek to disqualify from appointment to the GOCO directors who have conflicts of interests, because they are also directors of, or have financial interests in, other defence companies. For example, this would mean that the CEO of BAES could not hold a directorship within any company associated with the GOCO. The MoD governor will monitor any changes to share ownership and directorship to identify any major changes that might introduce conflicts of interest. Ultimately, should it be required, the MoD will retain and be able to use appropriate change of control provisions within the articles of association with the GOCO-operating company within a two-company structure and the contract between the MoD and the management company. I do not think these amendments are necessary as the issue is already covered by provisions within the anticipated contractual documentation.

The invitation to negotiate requires the GOCO, both ManCo and OpCo in the two-company structure, to be a UK company. This will be a condition precedent for awarding the GOCO contract and also be contained in the operating company articles of association. The GOCO is also required to conduct its business so that the centre of main interest of the operating company is deemed to be in the United Kingdom. As far as the award of the first term of the contract is concerned, therefore, the eventuality envisaged in proposed subsection (7A)(a) does not arise.

Conflict of interest issues are being managed robustly as an integral part of the materiel strategy commercial process. In the pre-qualification questionnaire, potential bidders are required to declare any perceived, potential or actual conflict of interests, together with proposals for how they would manage them. In addition to providing information regarding existing or future contracts with the MoD, potential bidders are also required to declare any personal conflict of interest. All declared conflicts of interest were reviewed and, if necessary, action was required to be taken before any company could proceed to the procurement phase.

The companies which successfully qualified to the procurement phase were required to enter into a bid participation agreement, which detailed the MoD’s requirement for management of conflict of interest and included an initial list of all conflicts of interest and how the MoD expected them to be managed. The intention is that this list will become a live document, which will be subject to ongoing review and will ultimately be enshrined in the GOCO contract.

Within the MoD all project branches are aware of the companies which are involved in the GOCO procurement and, if they have any concerns about potential areas of conflict, they are required to consult the MoD MatStrat commercial team for guidance before proceeding. Any company which is considered to have unmanageable conflicts of interest may be asked to remove themselves from the competition or, alternatively, from any existing contract which may be the cause of the conflict.

The materiel strategy invitation to negotiate required the proposed GOCO, both the proposed management company and operating company in the two-company structure, to be a UK-registered company. This will ensure that any GOCO contractor will be required to comply with UK legislation, including the obligation to pay UK tax.

The GOCO will also be required to conduct its business so that the centre of main interest of the operating company is deemed to be in the UK. Management of information which is considered to be commercially sensitive or security classified will be subject to stringent conditions under the GOCO contract. Such conditions will include, but may not be limited to, restrictions on the extent of information that can be shared between the OpCo and the ManCo, and between the ManCo and its respective parent companies. These types of restrictions are not uncommon on MoD contracts where the parent company is not based in the UK.

The draft company articles of association for the GOCO and the Government’s provisions in the draft contracts state that one of the parent companies cannot be taken over without the MoD’s authority. The MoD’s approval is also required before the GOCO contract can be assigned or novated. One of the grounds on which such authority could reasonably be refused is national security. Also, the articles of association specify that at all times at least one of the CEO or the chairman of the operating company’s board must be British. The MoD would be able to veto an appointment that would leave the board with neither of these posts held by a British national. As a fallback, should the need arise, the MoD will also have the power to remove the CEO of the operating company.

The noble Lord, Lord Rosser, asked whether the Secretary of State would negotiate any leases and the answer is yes. On maintenance, the conditions of maintenance would be properly specified in the contract between the MoD and GOCO. On the central government trading entity, property would remain in MoD ownership and staff would remain civil servants. On the export policy of a bespoke trading entity, export policy remains within the Ministry of Defence, expressed through government policy.

On the description of the trading entity, none of the generic organisational models fits our need so DE&S will be bespoke. It will be an arms-length body with a hard boundary with the rest of the MoD, a separate governance and oversight structure with a strong board under an independent chairman, and a chief executive who will be an additional accounting officer, accountable to Parliament for the performance of the organisation. It will have significant freedoms and flexibilities agreed with the Treasury and Cabinet Office around how it recruits, rewards, retains and manages staff. This will reinforce the customer-supplier relationship, facilitating a more businesslike approach and culture change, including hard charging of customers and the injection of private sector skills through the appointment of managed service providers for project delivery, finance, MI, IT and HR. Finally, the delivery of mechanisms that provide a robust performance baseline will allow the MoD, at a future date, to retest the market’s appetite for continuing DE&S evolution into a GOCO.

I am conscious that I have not answered all the questions, particularly those of my noble friend. I undertake to write to noble Lords as soon as possible—certainly well in advance of Report. In conclusion, although I think that the amendments tabled by the Opposition raised some excellent issues, I must resist them for the reasons I have outlined and therefore ask the noble Lord to withdraw the amendment.

[Lord Rosser]

I thank the Minister for his considered response and the noble Lord, Lord Palmer of Childs Hill, for his comments. The Minister appeared to address most of the questions I raised but there is one I am not sure he gave an answer to—he may well have done so. He said that the Secretary of State would be involved if it was a case of renting or leasing out property. Could I just check that it will not then be open to the company with the GOCO to rent or lease out property acquired under Clause 1(b)(i) which was not being rented or leased out at the time of acquisition?

The Minister also made a number of references to the GOCO contract. To what extent will the terms of that contract be in the public domain or—if I can use the expression—hidden from view as far as the public is concerned? I believe that the Minister said that freedoms and flexibilities had been agreed with the Treasury and will come back to that issue on a later amendment. Once again, I thank the Minister for his response. I do not know if he is in a position to respond to the two issues I just raised but it is of course my intention to withdraw the amendment.

[Lord Astor of Hever]

The answer to the noble Lord’s first question is no, it would not be. I will write to the noble Lord about the second question on contracts.

[Lord Rosser]

I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Amendments 2 to 5 not moved.

16:00

Debate on whether Clause 1 should stand part of the Bill .

[Lord Rosser]

My Lords, we had a lengthy debate at Second Reading on the Government’s decision no longer to proceed with their then plans for the GOCO option but to continue nevertheless with Part 1 remaining in the Bill. It was not made clear then why Part 1 was still relevant or needed and, in my opinion, that remains the situation.

Part 1 is not about some minor change, it is about a major change to the £10 billion annual defence procurement arrangements and procedures, a change to an as yet untried and untested way of doing defence procurement not only in this country but in any other country in the world. The Government now intend to go down the road of further developing DE&S+, something which one might have thought they would have done before deciding whether the GOCO option should be considered. Surprisingly, the further development of the DE&S+ organisation will be under the leadership of someone who, it has been claimed, does not actually believe that it is the best way forward but favours the GOCO alternative.

One suspects that that decision has been made at least in part because the view of that individual reflects the Government’s stance, a stance that also involves putting in place the necessary legislative provision to proceed with the GOCO option at some time in future, but with the added advantage for a future Government of being able to make the change with the minimum of further scrutiny and challenge by Parliament. There can, after all, be little or no effective scrutiny now of Part 1. There is a limit to the amount of hard information that the Government can provide about why the GOCO option would be better or what the financial advantages would be compared to other options, because we did not even get to this stage of having two or more private consortia willing to tender and set out their stall, a development which in itself raises question marks about the whole GOCO proposition.

Why then are the Government persisting with the retention of Part 1 when, even on their own admission, nothing will happen that needs the powers contained in Part 1 this side of a general election? Part 1 is not about giving this Government statutory powers that they plan to use; in fact, it is the exact opposite, it is about giving statutory powers that this Government have now explicitly said that they will not be using, following the collapse of the commercial competitive tendering process.

Part 1 should be deleted because it provides for an untested and untried major change in defence procurement which this Government do not intend to introduce and for which they cannot and will not be able to produce any evidence that it will provide a better alternative at some time in future than either the existing arrangements—or, significantly, the further developed DE&S model, which does not even come into being until April this year.

By retaining Part 1 at the same time as they say that they want to develop further the DE&S+ option, the Government create a situation of continuing uncertainty over the future of the defence procurement organisation for a period of a few years at a minimum. It will not make it easier to recruit people, for the highest levels of the organisation at least, if it is faced within a relatively short period with the real prospect of becoming a GOCO under new private ownership, as it will be the most senior people in the new DE&S+ organisation who will be the most likely to be replaced by the new owners with their own appointees.

What is the Government’s objection to saying that we are now going down the road of DE&S++ and only if that does not deliver the improvements in defence procurement that we are seeking will we look at the other options? What is their objection to saying that, in the mean time, we are not even considering other options or providing legislative provision to introduce them with inadequate scrutiny—not least because we are talking about radically changed arrangements for the future delivery not of £10 million-worth of taxpayers’ expenditure but of £10 billion-worth of taxpayers’ expenditure each year?

A major change in the arrangements for delivering on such a large sum of taxpayers’ expenditure in an area of cutting-edge technology that is crucial to the nation’s security should be subject to the fullest parliamentary scrutiny, based on the facts available and the position in relation to any new procurement arrangements at the time that the change is proposed to be made, not on the basis of the virtually non-existent facts and details that appertained a minimum of three or four years previously, at a time when it had then been decided not to proceed with such a change in defence procurement arrangements.

The Government’s proposed amendment for affirmative orders as a means of providing parliamentary scrutiny in a minimum of a few years’ time, and possibly considerably longer, is, frankly, inadequate. There is no requirement as to how much information, including comparative information, should be provided, and by whom, with such affirmative orders, or the extent to which the information justifying the action and decision covered by the order should be subject to scrutiny.

That is quite important when we are talking about a significant, untried and untested change in the arrangements for procuring defence equipment worth, as I have said, some £10 billion per annum of taxpayers’ money and when we are talking about affirmative orders that cannot be amended but have either to be accepted or rejected as a whole. The Government’s proposed affirmative orders provide no proper checks or scrutiny, bearing in mind the magnitude of what we are talking about. I fear that no soothing or calm words from the Minister about what information might be provided, or however much debate or discussion there might be will alter that fact, not because such words would not be genuinely meant, but because nothing the Minister says commits the Government who would be involved to anything. For it will not be this Government who are in office when decisions are made on whether to continue with DE&S+ or establish a GOCO.

If the decision is made to establish a GOCO it will not be this Government but the next or a subsequent Government who will decide how much information should or should not be provided to Parliament. It cannot be right to pass legislation now which enables a future, unknown Government to make a major change in defence procurement at some time ahead in circumstances that are currently unknown without having to come back to Parliament with a Bill so that they can be made to justify their proposals in detail in the light of the circumstances at the time, with their proposals subject to possible amendment as well as rejection. That is a further reason why Part 1 should be deleted from the Bill. Since it will be a future Government who will take the decision to make a radical change in our defence procurement arrangements, if that is what they decide, it is that Government, not a Government who have decided not to make the change during their term of office, who should have their proposals and reasons for the change subject to full scrutiny by Parliament through a Bill.

How do we meaningfully discuss what the GOCO option will mean in practical terms and the many questions that will need answering when we are not discussing it with the Government determining what the GOCO option means in practical terms and giving responses to the questions that need answering? There are many questions that will need to be discussed and answered but these must be answered by the Government who are making the switch to the GOCO, if that is the stage that is reached. They include questions on the GOCO relating to conflicts of interest, impact on national security, treatment of intellectual property, retention of sovereignty, the operation of any civil and criminal penalties, actual risk transfer and retention of the skills base, for example.

There are other reasons why we should not be giving some future Government at some future, unknown date the power to make major changes to our defence procurement arrangements simply through affirmative orders without full parliamentary scrutiny. Such scrutiny would also take into account how effective the changes have been that are now proposed in the DE&S+ organisation, changes which this Government did not intend to test or evaluate before making a decision on the GOCO option, since it is only now that the Government have decided to make the further changes to the DE&S+ proposition. One would have thought that the Government would have done their utmost to keep defence procurement as a core business for the Ministry of Defence and would not even have considered outsourcing through a GOCO until all options which would keep it in house had been tried, to see whether the necessary improvements could be delivered through that channel. If that can be achieved it would have the advantage of retaining the procurement capability within the Ministry of Defence and the knowledge that goes with it, which will, at the very best, be significantly weakened under the GOCO proposition.

Defence procurement is not simply about what may be the best course of action in commercial terms, but involves a multitude of considerations including political considerations such as the impact of procurement decisions on national, regional and local economies and the future of the defence industry. Such decisions can have international and strategic implications on collaborative projects, for example. It is also the case that the provision of Armed Forces equipment involves uncertainty over both the cost and capability, now and over some years, of cutting-edge technology. This has to be capable of being upgraded or adapted as necessary to meet the increasing sophistication of the equipment deployed in the future by those we might confront in differing conditions in different parts of the world. In addition, the effectiveness of equipment used by our Armed Forces can only be definitively assessed once it has been used in action.

How all these issues and considerations will be addressed and covered in the terms of a GOCO also requires answering, but by the Government who decide to make the switch to a GOCO and not by the Government who do not, and by the Government negotiating the arrangements with the successful GOCO operator and not by the Government who are not. Questions of that magnitude and importance cannot be addressed and considered in a discussion on an affirmative order, as opposed to a parliamentary Bill. Neither can this Government say that there would not be time in the legislative programme for a further Bill dealing with defence procurement, because that would be a matter for the next or a subsequent Government to decide when determining their legislative priorities. One thing that we do know is that there will have to be a further Armed Forces Bill shortly after the next general election, which will provide a legislative opportunity if one is needed at an early stage.

The Government have stated their intention to change DE&S into a new, bespoke central government trading entity with effect from April and have said that the new organisation will be permitted significant freedoms and flexibilities agreed with the Treasury and the Cabinet Office. At Second Reading, the Minister referred to,

“getting the best out of freedoms that we have agreed with Her Majesty’s Treasury and the Cabinet Office, which are necessary for the new DE&S”.—[Official Report, 10/12/13; col. 771.]

Will the Minister now spell out what those freedoms are that have been agreed with the Treasury and the Cabinet Office, what changes they will lead to in the DE&S organisation from April that do not apply in the DE&S organisation as it is today, what their impact is expected to be and what their additional cost, if any, is expected to be? What goals, objectives or targets are being set for the DE&S organisation that comes into being in April and how will they differ from those applicable to the current organisation?

It rather appears as if the new DE&S organisation, in the eyes of this Government, is to be used as little more than a stalking horse for the GOCO, since the Minister said at Second Reading:

“We believe that a GOCO remains a potential future solution for transforming DE&S once we have put in place a more robust baseline from which to contract with a GOCO partner”.—[Official Report, 10/12/13; col. 768.]

That suggests that bringing in private sector support to transform DE&S further within the public sector is being regarded simply as a stopgap measure by this Government. Be that as it may, perhaps the Minister could indicate the extent and breadth of the private sector support that is being brought in now and the form that it will take and where it will come from. Is the private sector support going to come from companies that the Government would like to see as GOCO partners?

As I have indicated, our view is that Part 1 should be withdrawn from the Bill, for the reasons that I have already given, and I hope that at some stage that is what the Government will do. Likewise, for the reasons that I have mentioned, we certainly do not believe that the Government’s proposals that Part 1 should be capable of being brought into effect by some future Government, by the passage of affirmative orders in both Houses, represents adequate scrutiny or the potential for adequate in-depth consideration or challenge.

A further amendment that we are proposing, which we regard as very much the second-best option behind withdrawal of Part 1, is for a super-affirmative order, which would require to be passed by both Houses before Part 1 could be brought into force. The amendment provides conditions that the Secretary of State must fulfil before a statutory instrument containing an order under subsection (1) in respect of Part 1 can be made. Those conditions are set out in Amendment 25 and require the Secretary of State to lay before Parliament evidence-based impact assessments of the risks and merits of at least the DE&S model as modified in 2014, the arrangements for defence procurement as laid out in Part 1 of the Bill—that is, the GOCO—and other options as may be recommended following consultation with the House of Commons Defence Committee. It also requires the Secretary of State to lay before Parliament an independent report setting out the comparative advantages of defence procurement arrangements and options to which I have just referred and for the Defence Committee to report to Parliament its findings on the independent report.

If the Government are determined to leave Part 1 in the Bill, we believe that the measures set out in our amendment would at least help to ensure that the next or a subsequent Government, if they decide to go down the GOCO route, would have to justify their decision to Parliament in some detail based on hard evidence relating to the circumstances at that time before they can proceed and that Parliament, when making its decision, would have the benefit of impact assessments, an independent view of alternative defence procurement arrangements and a review and report on that independent report by its own Defence Committee in the House of Commons. That will be the minimum necessary if Part 1 is not withdrawn from the Bill to at least ensure appropriate scrutiny of a future Government’s proposals and reasons for establishing the GOCO option for defence procurement.

16:15

[Lord Robertson of Port Ellen (Lab)]

My Lords, I declare an interest in that I work for the Cohen Group, a Washington-based consultancy led by a former Secretary of Defence, William Cohen.

I support the idea and concept of a GOCO. However, I also recognise the powerful case made by my noble friend in relation to secondary legislation. We should consider the GOCO because something radical needs to be done about defence procurement. I was Secretary of State for Defence for two and a half years, too brief a period to get to terms with the scandal that has been the continuing story of defence procurement in this country. The story of cost overruns and time overruns is deeply disturbing and worrying.

Over the past weekend, I took part in a security conference in Munich. There was a special session with a number of talented and experienced people talking about European defence and the crisis of diminishing defence budgets in the face of both existing and emerging threats. I made the point in that discussion that we were unlikely to get defence budgets stabilised or increased. Unless the case can be made to the general public that there are threats that need to be dealt with, defence budgets will continue to go down. At the moment, advocacy of the need for defence is missing.

At the same time, the case is consistently undermined by the fact that we do not use existing defence budgets properly or effectively. First, there is a multiplicity of defence projects across Europe which duplicate in many areas what we could do; a focus on items of capability which are related to the Cold War and not to future threats; and the sheer number of tanks and hopeless aircraft in the European arsenal which relate to yesterday’s enemy and not to the future. Secondly, and importantly, a large amount of money is wasted on the way in which we procure defence. As Secretary of State, I thought it was important that we should deal with that issue and look at it radically. In the strategic defence review of 1998, which I supervised, we made radical changes to defence procurement. I am sad that I did not stay there long enough to pursue it. My successors also tried and failed to get to grips with it as well. The term “smart defence” was coined by me at a press conference during my time at the Ministry of Defence, but it has become less and less smart as time has passed.

The saga continues and will do so until something radical is done. The thinking at that time was put together by me and my special adviser, Bernard Gray. He was employed by me—I took him away from the Financial Times, where he was the defence editor, in order to be my special adviser—and I frankly admit that we would not have had such a good and long-lasting defence review if it had not been for Bernard Gray’s clear thinking and his powerful purpose during that time. People criticise him now, but I believe that he is one of the few people who has the intellectual grasp and dynamic conviction to drive through the required changes. The noble Lord, Lord Levene, was appointed by Lady Thatcher to look at defence procurement, and he made a good fist of it then, but again he moved on before it could be fully put into practice. If my private sector experience since I left NATO has taught me anything, it is that execution is a critical area to focus on to get outputs instead of just excellent inputs.

The GOCO concept is certainly radical—and my noble friend is right that it is in many ways untried—but many people are watching us because many countries have exactly the same problem. We have to look at that. It is sad that the process failed, and that only one competitor—if that is the right word—was left standing at the end, but the process produced a number of proposals, as part of the tendering, that indicated that major savings could be made. There may only have been one left at the end of the day, but each competitor put forward proposals that would have saved the taxpayer money and made sure our troops got equipment much more on time. DE&S+ is second best, but it has to be tried, given the situation. The radical nature of what we have to do is utterly justified by the fact that our troops do not get the equipment at the right time and in the right form, and the taxpayer also pays well over the odds for it. If we do not think radically, the same old mess will continue.

However, my noble friend has made a powerful case for the GOCO, having been shunted into a siding, remaining there until it is a reality and we have had time to test it properly—and secondary legislation is not the right way to do that. Therefore, Amendment 25 is a good way of making sure that when the day comes, as I am sure it will, when we go down the GOCO route, there will be the proper scrutiny that the idea deserves.

[Lord Roper (LD)]

My Lords, I believe we should give consideration to Part 1 at this time, and that it should remain in the Bill. I am therefore unable to support the suggestions by the noble Lord, Lord Rosser, that these clauses do not stand part of the Bill. His points about the gap between now and when the GOCO comes into effect are important; that is why I asked the Secretary of State, when he came to see some of us, for an assurance that there would be an opportunity for Parliament to make a clear decision before Part 1 came into operation. That is why the Minister tabled Amendment 24, suggesting that there would have to be affirmative Motions in both Houses. My noble friend Lord Palmer and I have added our names to that, because it is in response to the request that we made to the Secretary of State. Since then the noble Lord, Lord Rosser, has tabled Amendment 25.

The case for a super-affirmative resolution needs to be examined. It will be useful between now and Report to consider the value and possibilities of such a procedure, perhaps making rather more explicit the scrutiny which would be given in this House, as well as by the Defence Committee of the House of Commons, of any proposal at the time when it is put forward. The super-affirmative procedure is a useful development of recent years, and there is a case for its consideration.

[Lord Palmer of Childs Hill]

My Lords, I will add a few points. At Second Reading, I said that I understood the weaknesses in Part 1 but wanted it to remain part of this legislation. I have not changed my mind on that. I thought the words of the noble Lord, Lord Robertson, about the scandal of defence procurement summed that up. Coming into this much more recently, it was clear to me with my experience of procurement that it was not fit for purpose. I am not blaming anyone for that: many people tried to change it, including some noble Lords in this Room, but were not able to.

The noble Lord, Lord Rosser, made the point about this being a stalking horse. In fact, the word used was “baseline”. The question raised by many noble Lords in previous debates was why two of the three bidders for the GOCO came out of the bidding. In my view, they must have realised that they could not work out the baseline—that is, the actual cost of running the department. Numerous sorts of contracts—even contracts with the same companies and contractors—are done under different agreements and bases. Therefore, two of the bidders left probably because they did not feel they could see where the profit was with any degree of certainty. Left with only one bidder, the Secretary of State was clearly right to say that one could not go forward with a GOCO at that stage. However, as my noble friend Lord Roper said, a great achievement was reached by some of us who spoke with my noble friend the Minister and the Secretary of State about having a sunrise clause—that is, Clause 24. That means that it has to come back to both Houses before you proceed with a GOCO. Whichever Government are in power when that happens, that will give them a big control.

The noble Lord, Lord Robertson, spoke very warmly about Mr Gray, the Chief of Defence Materiel. I have only come to this more recently and probably never saw all the good things that the gentleman did. We are in a new ball game now. DE&S+ will come into force only in April and will probably get going properly only by the autumn. Mr Gray’s contract ends on 31 December 2014. He might well apply for the new chief executive post thereafter—that is of course everybody’s right, and the employer has every right to decide who it should be. However, this is purely a run in, using Mr Gray’s experience in the coming months to help set up DE&S+, and it is obviously in the future as to who that person or persons will be.

A very good question was raised by the noble Lord, Lord Rosser, about the freedoms agreed with the Treasury. I hope my noble friend the Minister when he replies can give some assurances on what levels of payment the Treasury will allow to be made to senior employees of the MoD. Also, why does he believe that the super-affirmative Motion is not needed with Amendment 24—in other words, why should we go with Amendment 24 and not Amendment 25? I look forward to my noble friend’s reply.

[Lord Levene of Portsoken (CB)]

My Lords, I can claim to have spent quite a lot of time working on this particular issue, having held the post of Chief of Defence Procurement for six years. The noble Lord, Lord Robertson, was kind enough to pay tribute to some of the work I did but said that I did not stay around long enough to finish it off. I was actually there for six years. If anybody could look through the results of the Procurement Executive, as it was called at the time, they would see that at the end of those six years as compared with the beginning we had actually resolved most of the problems. I say that without fear of contradiction because if anyone consulted the report prepared by the National Audit Office at that point they would find that for the first time the outturn of the budget matched what we expected it to be and that contracts were being delivered on time.

16:30

So what was the magic formula? It was to try to even up the negotiations between the suppliers on once side and the buyer—the Government, Ministry of Defence, the Armed Forces—on the other. There were a few battles during that period but we seemed to have got it right. Even some of the most implacable foes of the policy that we were trying to introduce, at the end of the day accepted that we were, in fact, doing the right thing. A side issue was the enormous success of the defence export side of the industry which found that it was far better able to sell its equipment because the terms on which it had been supplying it to the Ministry of Defence were no longer so-called sweetheart terms but tough, negotiated terms. This made the firms much more competitive than the companies also in the industry in other countries.

I was brought in through a combination of the late Baroness Thatcher and the noble Lord, Lord Heseltine, at a time when they were actually speaking to each other, to try to bring a more commercial element into the work. I do not claim any genius for having done this; it was simply to run the operation on commercial terms, and it is a business involving one party buying equipment and the other one selling it. Where had been the problem? It was not in the civil servants’ and serving officers’ understanding of the equipment, which they understood well enough. However, they had not been trained in commercial negotiation. That was the one element of the puzzle, if you like, that I brought to it.

I was the first person who ever introduced a GOCO into the Ministry of Defence. Before I started on procurement, I was given the task of trying to sort out the problems that had existed in the naval dockyards at Rosyth and Devonport since the time of Samuel Pepys. We managed to resolve them by taking away the management of those dockyards from what had been an extraordinarily bureaucratic organisation and giving it to two very successful commercial companies that turned around the performance of those dockyards. I am sure that the noble Lord, Lord Robertson, will remember how things changed in Rosyth. That worked very well.

However, I have been implacably opposed to the idea of a GOCO for procurement because it is not the right place in which to use it. It works well in an industrial operation such as a dockyard but does not work well as a commercial negotiator. What are needed are the skill of the serving officers within the Armed Forces and those who are seconded to the Ministry of Defence, and the skills of the civil servants, particularly the technical ones who understand the equipment that they are buying. That leaves just the element of commercial skill on top, which is what I was asked to bring in, and which I did. Although we have yet to hear what they are, I believe that with the new-found freedoms that we understand the Treasury has agreed, the Ministry of Defence will be allowed to negotiate and involve a small number of people with commercial experience at the top. That will work.

It is undoubtedly the best way to go and, as I understand it—although it is complex for everyone—that is what DE&S is intended to bring in. I do not believe that it right to bring in a GOCO. We cannot discount the fact that no one else in the world has brought in a commercial organisation to run their procurement. If no one else wants to do it, why do we want to do so? DE&S+, which we have now ended up with, with a suspension of any move towards a GOCO, is the right thing to do. Although perhaps few people know this, the noble Lord, Lord Roper, who sitting on my left, used to teach me. He may recall that that was the sort of thing that he would have taught me at the time. If we stick with DE&S+, I would agree entirely that it would be good to shelve permanently the idea of bringing in a GOCO and leave it as another issue. If a future Government want to bring one in, that is entirely up to them, but we should not have this sort of trap door through which it can escape, if someone has the right key. We are now in the right place and we should stay there.

[Lord Bach (Lab)]

My Lords, I shall not speak about the advantages or disadvantages of a GOCO; I remain fairly neutral on the issue. I have listened with great interest to the very good speeches that we have heard so far on this clause stand part debate started by my noble friend Lord Rosser. What concerns me is the point about an affirmative order being somehow a solution to this problem.

I will not speak with my ex-Minister for Defence Procurement hat on at this stage, although there is plenty that I could say and would like to say. I am concerned about statutory instruments being used in Parliament in both Houses as a way of holding Governments to account. My experience is that orders, whether negative or affirmative, are useful and the debates that follow from them are often vital when legislation is eventually brought into effect. My concern is that they are no way for Parliament to stop something happening that should not happen.

I speak from experience. This is not a boast but I am one of the few Members of this House who has successfully won a fatal Motion on an affirmative order. There are others on all sides of the House, but it is a very rare event. It happened a few years ago, on a completely different subject from this one, to legislation which required an affirmative order but was resisted. The House voted on that occasion by a very small majority not to pass the affirmative order. The consequences of that for the cause that I was espousing were probably worse than if I had not won that vote. The Government decided that they would do absolutely nothing about the fact that the affirmative order had been voted against and so the previous position then applied. It was a worse position than the one I was trying to get and on which the House had supported me. Since then, forgive me, I have been slightly sceptical—even cynical, sometimes—about how effective opposing affirmative orders can be. We know that we can oppose them, regret them or just have a debate on them, whichever either House decides to do, but the effect is nearly always the same: the Government get their way. The primary legislation is there and it is extremely hard—often impossible—even if the primary legislation needs to be amended by the affirmative order, for that to happen.

All I am saying in this debate is please do not choose an affirmative order as a way to get around this issue. Frankly, once you have passed legislation that includes a GOCO, if that is what the House decides to do, it will be extremely difficult, if not impossible, for either House of Parliament to change the position.

[Lord Craig of Radley (CB)]

My Lords, I shall speak briefly to the amendments. I look at the matter from the point of view of the user, the Armed Forces, and what is in it for them.

Nowadays, the Armed Forces will have much more say over the amount of money that may be spent on their equipment, and therefore they may take more of an interest in the detail of the procurement side than was true in my day. Nevertheless, it is important that they have confidence that whatever system is going to procure their equipment has general support throughout the country and throughout government. At the moment we have two propositions, neither of which seems to be making good headway. The GOCO has certainly made no headway and it remains to be seen how well the DE&S+ will go—I even have doubts about that—but, of the two, I prefer it the GOCO.

However, dealing with the amendments, I find a good deal of attraction in Amendment 25. It brings the super-affirmative approach to the issue and is the one that I would favour.

[Lord Davies of Stamford (Lab)]

My Lords, I was the last defence procurement Minister in the previous Government. It is too early to make definitive judgments about how well-based were the projects for which I was responsible because some of them were quite long term. As far as I know, most of them are doing well and are on track and on time. They include the A400M, the Typhoon Tranche 3, the Chinook contract—where the Government, sadly, cut the numbers from 22 to 12 —the Puma upgrade, the Scout vehicle and so on.

However, I inherited a number of contracts which were the subject of substantial cost and time overruns. They were originally signed in the late 1990s. I will not make party-political points by saying exactly when they were signed now because otherwise you will think that I am making a party-political speech, which I certainly do not intend to do. Those errors were based on a fundamental mistake, which is to think that there is one simple formula for defence procurement. There have been arguments for many years, for generations, about whether you should have cost plus, competition or fixed-price contracts. The answer is that all these formulas are appropriate in certain circumstances. However, the great mistakes were made on projects such as Astute and Nimrod, which involved new technology and new developments—a new generation of reconnaissance aircraft in one case and hunter-killer submarines in the other.

It was a fundamental mistake to think that those procurements could be conducted on a fixed price because, when you are at the frontiers of technology—I said this on Second Reading—by definition you do not know what problems you are going to encounter and how much time and money will be needed to resolve them. If you ask a contractor to come up with a fixed price it will either be crazily high to cover all possible risks to himself or, more likely, if he thinks that being a national provider he is going to get the contract anyway, he will come up with an unrealistically low price, knowing that he can renegotiate more favourable terms once the Government and the MOD are committed to that contract because ultimately the Government have to have that capability delivered.

That is the phenomenon we suffered from with those two disastrously-conceived projects, although the capability was absolutely necessary. It was a great mistake for the Government to get rid of the MRA4 when they came into power. The Astute programme has continued and is delivering results, and I am very glad about that. The MRA4, however, was a great error. If you have a first of class of a major aircraft or naval vessel—a major platform—an absolute rule is that that is inevitably going to be a prototype. You cannot actually call it a prototype because you cannot build a combat aircraft for £100 million, or a Type 45 destroyer for £1 billion, or an Astute class submarine for £1.2 billion or £1.5 billion and then throw it away. So it is not going to be a prototype.

You are going to make some mistakes in building it the first time round. You will need to make amendments and changes which you had not originally foreseen and these will all add to costs and time. The only solution is to have a version of cost plus during that period for the first of class. Subsequently, when you have an idea of the technical issues and have resolved them, you can refine the thing down and ask for a fixed price. It must be a sophisticated version of cost plus and the formula that I found most useful—we have got it now for the Astute programme—is a target price with an incentive for coming in under the target price; a share of the over-run if it is above the target price; and a completely open book policy so that there is a genuine sense of teamwork between customer and supplier. Those formulas can work. One has to be quite flexible about this and not believe that there is some perfect, platonic solution to defence procurement.

16:45

At Second Reading I explained why I was against the GOCO in principle and the noble Lord, Lord Rosser, has repeated some of the arguments that we both used at Second Reading. The most important one is, of course, that defence procurement should remain a core business of the MoD. I have never believed in a GOCO. It has always seemed to me to be an expensive solution; something which would add rather than reduce cost and would deprive the MoD, the defence procurement Minister and the Government as a whole of the flexibility which is so essential. It is essential because the threat changes, or the enemy changes, or the enemy changes his tactics, or new opportunities open up for international collaboration. One needs to be extremely flexible and able to change the system quite rapidly. One needs to be able to steer the ship.

One cannot do that if one has made a contract with some GOCO under which, for a whole year, it has defined tasks to complete and it gets a penalty paid to it if you make any changes in the specification. For all those reasons, I have always thought it is a great mistake to go the GOCO route. We would have greatly regretted it if we had gone the GOCO route and we will greatly regret it if we go that route now.

The only sensible argument in favour of it is that it would enable us to hire people in the DE&S or in the GOCO at market rates, rather than being constrained by civil service pay. It would be utterly ridiculous to go for a GOCO merely to achieve that objective, which could perfectly well be achieved on the basis of DE&S+. Indeed, I hope that that is what DE&S+ is substantially about. The MoD already pays people, including the Parliamentary Under-Secretary and Mr Gray, who has been referred to, on the basis of salaries which have nothing to do with the Civil Service pay scale, so I do not see that as a good argument.

I am against the GOCO in principle, as I have said before, but, as my noble friend Lord Bach, has just said, there is an argument which goes above and beyond the issue of defence procurement, significant and weighty as that is for the national interest, about the way in which we legislate here. It is fundamentally wrong simply to give a future Government a blank cheque and say that Parliament will allow any Government in the future to come back without full parliamentary scrutiny and go in for a major reform of this kind. My noble friend Lord Rosser has made a number of those arguments so I do not need to repeat them. It would be a very unfortunate precedent if we establish that.

I do not think that the Government even intended to create that sort of precedent. What happened is that the Government changed their mind at the last minute and thought it would be extremely humiliating to bring forward a Bill at Second Reading having taken out the first part of it. They therefore thought that the sensible thing to do would be just to let it stay there. They would not make this humiliating cut to their Bill on day one but would say, “This might be useful in the future if we change our mind”. That is an extremely casual, indeed frivolous, way to conduct parliamentary business and I am sorry that they proceeded along those grounds.. They would have done much better to have courageously said, ”We have changed our mind and so the first part of the Bill does not apply any more. Let us have a debate on the second and third parts and we will withdraw the first part”. That would have been the sensible thing to have done. It is still the sensible thing to do and I very much support my noble friend’s amendment.

[Lord Astor of Hever]

My Lords, I start by thanking my noble friends Lord Roper and Lord Palmer for their support and I will look very closely at their suggestions. I always listen very carefully to the noble Lord, Lord Levene. He mentioned the importance of defence exports, and I agree with him entirely on that. He mentioned that he was brought in to bring more commercialisation to the operation, and everyone tells me that he was very successful at that. That is exactly what we are trying to do, and I agree that civil servants are not the best people to be commercially aware. We may end up sticking with DE&S+ but we want the flexibility with which the Treasury and the MoD are negotiating at the moment.

The noble Lord mentioned freedoms and controls. As I said, officials are in discussion with the Treasury regarding the nature of the delegations required within the DE&S budget, which revolves around how DE&S recruits, rewards, retains and manages staff. The detailed application of those freedoms will be worked on through the first year of operations, and DE&S staff will remain core to organisational delivery. We want to enhance our skills in bringing in private sector expertise. Further to the work done by Booz & Co on the functional make-up of DE&S, we are conducting a zero-based review to look at the organisation on a post-by-post basis.

I can tell the noble Lord that the Treasury has already agreed—this is not part of the GOCO bespoke trading organisation debate—to limited freedom for the MoD to recruit commercial officers from industry at market rates in recognition of their niche skills. This concession will remain in place as we move to the new organisation on 1 April this year. I will answer the other questions I was asked when I finish the first bit of my speech.

Part 1 sets out the provisions and safeguards necessary to transform the Defence Equipment and Support organisation into a government-owned, contractor-operated organisation—a GOCO. On 10 December last year, the Secretary of State announced a halt to the competition to select a consortium to deliver the GOCO. Although the bidder, known as Materiel Acquisition Partners, engaged effectively with the very challenging brief set out and presented a credible and detailed bid, the Secretary of State concluded that we did not have a competitive process once the other remaining consortium chose not to submit a bid, and that the risks of proceeding with a single bidder were too great to be acceptable.

Further work is necessary to develop DE&S financial control and management information systems to provide a more robust baseline from which to contract with a risk-taking GOCO partner. We remain clear that the only realistic prospect of resolving the delivery challenges facing DE&S in an acceptable timescale is with the injection of a significant element of private sector support. Noble Lords will also recall from the Secretary of State’s announcement in December that we decided to transform the DE&S further within the public sector, bringing in that private sector support and ensuring that it becomes match-fit as the public sector comparator for any future market-testing of the GOCO proposition.

To address the concerns expressed by a number of noble Lords about the continuing need for Part 1 in the light of the Secretary of State’s announcement, I tabled a government amendment that would make the commencement of Part 1 subject to an affirmative resolution by both Houses of Parliament. We have done this in recognition of the likely timescale for any future consideration of a GOCO option as the way forward for DE&S. To do this, we intend to set the DE&S up as a bespoke central government trading entity from April 2014. The new entity will be at arm’s length from the rest of the MoD, with a separate governance and oversight structure consisting of a strong board under an independent chairman, and a chief executive who will be an accounting officer, accountable to Parliament for the performance of the organisation. Importantly, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury and Cabinet Office.

Although I understand concerns that have been raised, I reassure noble Lords that we would not seek to retain legislation without good cause. The changes we are now making to DE&S are important, but we cannot guarantee that this approach will prove to be efficient. We need to ensure that we can move quickly to run a future GOCO competition if the new DE&S freedoms prove insufficient to transform the organisation. The Government are convinced that Part 1 remains necessary to deliver an effective GOCO if—I repeat, if—that is the option selected by a future Government. It should therefore remain part of the Bill, to ensure that any Government can move quickly to a GOCO if that is so desired.

Clause 1 is the key clause in Part 1, as I have already described. Although the Secretary of State could enter into a contract with the GOCO using common law powers, the scale of what is contemplated, in terms of both money and people and the important nature of the work that DE&S undertakes, is such that Parliament should have the opportunity to scrutinise and agree the proposals through specific legislation. An important potential change such as this should be made with the consensus of all parties and with the express approval of Parliament. It is right that we have chosen this approach. Clause 1 is the main provision for that debate, and there has already been an insightful and important discussion on it through the amendments tabled by the Opposition in the other place.

Clause 1 also covers the arrangements for the transfer of procurement services once the initial and any subsequent contract comes to an end. It also allows for the transfer of DE&S services to the GOCO in a phased way. Clause 1 provides the basis on which the other provisions in Part 1 work. For example, the exemptions at Schedule 1 apply to premises which are used by a contractor under the arrangements at Clause 1. Clause 1 also includes many of the definitions used in Part 1. If Clause 1 is removed, the other clauses in Part 1 will need to be substantially redrafted to make them work.

If Clause 1 is removed, the Secretary of State could still contract out defence procurement services to a GOCO using his common law powers, but there would be no clause on the general issue of contracting out defence procurement services. This would deprive Parliament of the opportunity to approve this significant change in the way in which the Ministry of Defence does its business through its express agreement to the clause. It would also require a significant rewriting of the rest of Part 1. For those reasons, Clause 1 should stand part of the Bill.

On government Amendment 24, which I have already described, it is appropriate that Parliament has an opportunity further to debate the provisions in Part 1 at a point before they are commenced. I have tabled the amendment to allow this. It requires that both Houses approve by affirmative resolution a statutory instrument to commence the provisions in Part 1.

We have listened carefully to the views expressed by noble Lords from all sides during Second Reading about the need for Parliament to have a further opportunity to consider any proposal for a GOCO, should one be brought forward by a future Government. The government amendment removes the requirement for Amendments 17 and 25, tabled by the noble Lords, Lord Rosser and Lord Tunnicliffe. Their amendments have enabled our informed debate about a number of important issues.

Amendment 17 goes much further: it seeks to place a lengthy consultation requirement on the Secretary of State before any draft commencement order can be laid before Parliament. It requires the Secretary of State to comply with any recommendation by the Select Committee on Defence as to persons and bodies to be consulted. It extends the period in which Parliament has to consider and debate the draft commencement order. These additional requirements are far too prescriptive and would place an onerous and unreasonable bureaucratic burden on the Secretary of State.

Amendment 25 would add yet more prerequisite requirements on the Secretary of State before he may place a draft order before the Houses of Parliament seeking to commence Part 1. The amendment seeks to make the Secretary of State’s power conditional on satisfying the powers set out in proposed new subsection (2B), which would require the Secretary of State to, first, lay before Parliament an evidence-based impact assessment, which must cover the risks and merits of available options, including the GOCO and the “do nothing” option of retaining the existing DE&S; secondly, lay before Parliament an independent report setting out the comparative advantages of the options set out above; thirdly, require the Defence Select Committee to review and scrutinise the independent report and report its findings to Parliament; and, finally, to lay before Parliament any other documents or information that it needs to inform its decision.

Amendment 25 is not required, as the activities proposed will either have been undertaken by the Ministry of Defence as part of its normal approvals process or are not appropriate for legislation as they could be considered to be normal business. Any future proposal to proceed with the GOCO option will be subject to a full, evidence-based business case and investment appraisal, which will set out the relative risks and merits of all credible options, including those cited as required in the amendment. The business case will undergo extensive cross-government scrutiny and assurance and will require ministerial approval before any option can be taken forward. Business cases are approved by the MoD Investment Approvals Committee and by both Ministry of Defence and Treasury Ministers. However, wider government approval is sometimes required—for example, in the most contentious cases.

17:00

The opposition amendment also seeks to require any decision to proceed with a GOCO option to be subjected to independent scrutiny and for a report to be laid in Parliament. Ministry of Defence investment decisions are already subject to external scrutiny by the National Audit Office and can be considered by the Public Accounts Committee and/or the House of Commons Defence Committee. We believe that this meets the requirement for independent scrutiny while preserving the confidentiality of any commercial process. The findings of either committee would be available to both Houses in the normal course of events and therefore a statutory provision is not appropriate or required. The amendment also seeks to make an order conditional on the Secretary of State providing all necessary information to Parliament to inform its decision. A statutory requirement is simply not necessary to achieve this, as the Ministry of Defence would comply with its obligations to ensure that Parliament is appropriately informed to make its decisions.

The noble Lord, Lord Rosser, asked why we should legislate. We still need the private sector skill injection. We need the new freedoms for the DE&S model. There will be scrutiny by Parliament at the time of a future decision to proceed with the GOCO. Part 1 has already been subject to detailed scrutiny. We feel that it is absolutely prudent to make sure that we can move quickly to run a further GOCO competition if the freedoms in the bespoke body prove inadequate and, when tested, a GOCO is the best option.

The noble Lord asked if there were any other options. The decision on whether to move to a GOCO will be on the basis of a full business case, so other options will be considered. Only if a GOCO represents a best option will that be proceeded with; we think that a GOCO will be the best option to deliver an enduring change.

The noble Lord asked what a bespoke central government trading entity is. It is an arm’s-length organisation with a hard boundary with MoD and the public sector but with freedoms and flexibilities to recruit, reward, retain and manage staff. The organisation will have separate governance and oversight, a strong board, an independent chairman and a chief executive who will be an additional accounting officer. I was asked whether it was just a trading fund. DE&S will not become a trading fund, but we will take the best features of that approach—strong governance, a clear organisational boundary and an emphasis on customer-supplier relationships—into the new bespoke DE&S entity.

I was asked why the new approach would work. We are in a better place than previously. The new approach builds on the work done on the DE&S+ proposition to transform DE&S further within the public sector, bringing in private sector support, ensuring that it is match-fit, as a public sector comparator, for future market testing of a GOCO proposition.

The noble Lord asked about the relevance and effectiveness of equipment procurement. The provision is precisely to deliver a more agile organisation capable of giving equipment and support better than currently achieved by DE&S. The assessment of performance will be by front-line commands—the bespoke entities and customers.

The noble Lord, Lord Robertson, asked about the support for looking at a GOCO. I agree with him that we need to look at radical solutions, and that includes a GOCO. This is not about undermining the new model but making sure that we have the legislation in place for a GOCO, should it be needed in future.

My noble friend Lord Palmer asked if the new model is about establishing a strong baseline for a GOCO, not about undermining the new model. He is exactly right. If a GOCO is to succeed in the future, we need a strong baseline. He asked about the unclear baseline or stalking horse. I agree; the key thing is for DE&S to define a clear baseline to underpin any new competition. That relies on DE&S becoming match-fit, which can only be good to enable fair competition.

The noble Lord, Lord Bach, asked about affirmative orders and felt that they were not a way in which the Government could be stopped from doing something. If the affirmative order is not approved, the GOCO cannot proceed in the way set out in the Bill. The status quo does not include legislation for a GOCO to operate effectively. The need for an affirmative order gives real choice to Parliament. A future Government—any Government—cold not establish an effective GOCO without approving Part 1 of the Bill.

[Lord Bach]

My point is that an affirmative resolution does not really provide any effective stop for Parliament, not that it does so. Given my experience of affirmative orders that have been fatally objected against, I wonder how the noble Lord can say that an affirmative order that is defeated really changes things. What happens is that the Government of the day—this is not a reflection on the Minister’s Government—say that the legislation has been passed and the affirmative order must therefore also be passed. In reality, fighting affirmative orders is not an effective way of allowing Parliament to give its view. For something as vital and important as this, having merely the protection of an affirmative order somewhere down the line is not nearly enough. I should be interested to know why the Minister thinks differently.

[Lord Astor of Hever]

I tabled our amendment after approaches from a number of noble Lords from different parts of the House who wanted to allow any future Government flexibility with which to introduce a GOCO, if that was thought to be the best thing at the time. In reply to the noble Lord’s question, one simply would not have the legislation without the commencement.

[Lord Robertson of Port Ellen (Lab)]

Can the noble Lord reflect after this debate on the fact that in the House of Commons, as the Commons Library statement says:

“Several amendments relating to the GOCO (Part 1 of the Bill) were tabled for Report Stage but were subsequently not called. Instead the main focus of the Report Stage was on the Government’s plans for the Reserves”?

So there was limited scrutiny in the House of Commons of this part of the Bill. Now the Government are proposing to promote the idea that a GOCO will be a matter for secondary legislation and affirmative resolution. Can the Minister take away the fact that in this sitting, we have had a former Chief of Defence Procurement, a former Chief of the Defence Staff, a former Minister for Defence Procurement and a former Secretary of State saying that, on balance, although they are in favour of radical reform, they all think that Amendment 25 is actually the best way of proceeding? Would it not look rather odd after that if the Government were to say, “We will ignore the advice that we have been given at that level, and arrogantly go ahead with a procedure that is perhaps inadequate”?

[Lord Astor of Hever]

My Lords, I will certainly reflect on that. We never ignore advice given by the people that the noble Lord mentioned. I am very happy to organise a meeting to discuss the issue, if he feels that that would be a way forward, before Report. I will certainly take it away to reflect on it. I have just been told there were eight sittings on this issue in the House of Commons.

The noble Lord, Lord Davies, said that cost-plus is the most appropriate type of contract for this class. The GOCO will have the commercial expertise that the MoD does not possess to identify the most appropriate contracting arrangements. In future, budgets will lie with the commands, ensuring that we can more quickly respond to changes in equipment requirements. The noble Lord asked about contracting arrangements for first-class major equipment. The target cost incentive fee contracting arrangements are one of the options available to the MoD for the reasons that he described and will continue to be utilised where they are the best option to deliver and support equipment procurement.

In the light of the government amendment and the points that I have just set out, I commend Amendment 24 to your Lordships; I will take away the point that the noble Lord, Lord Robertson, mentioned; and I urge noble Lords not to press Amendments 17 and 25.

[Lord Rosser]

First, once again, I thank the Minister for the consideration he has given to the amendments and for the detail with which responded to the points that have been made. I also thank all noble Lords who have contributed to this debate with varying degrees of support for the super-affirmative procedure and for the deletion of Part 1. I think it is fair to say that the noble Lord, Lord Palmer of Childs Hill, very much left his options open and was waiting to hear what the Minister said on the question of the super-affirmative procedure.

My argument for removing Part 1 is that this Government no longer intend to go down the GOCO road. It will be for the next or a subsequent Government to make such a decision one way or the other, and it is that Government who should have to justify their decision in detail to Parliament in the light of what improvements have or have not been achieved through the DE&S++ organisation after the changes being introduced after April this year.

The Minister referred to the freedoms and flexibilities that have been agreed with the Treasury in relation to the DE&S organisation from April of this year but, personally, I would find it helpful if he could put in writing what has and what has not yet been agreed with the Treasury and whether there is also agreement by the Cabinet Office; we understand that those freedoms and flexibilities have to be agreed with both, and I do not think that the Minister referred to the Cabinet Office.

One justification that the Minister gave for keeping Part 1 was that it would speed up the process of moving to a GOCO if the decision was made to go down the GOCO road. I do not think that speed is the most important thing. After all, it has already just been delayed for at least three years, so how can an argument be put forward that we need this legislation in place on grounds of speed? The Minister also referred to my amendment and the proposals within it as an unreasonable burden on the Secretary of State. The convenience of the Secretary of State of the day is not the matter we should be worried about. What matters is proper scrutiny of the proposals and getting them right through parliamentary scrutiny, not speed or the convenience of the Secretary of State of the day.

17:15

The Minister gave some assurances about what information would be provided if it came to the Government’s proposal for the affirmative orders but I simply repeat what I said earlier: this Government are not in a position to commit through words a future Government and what they will do. The Minister can say it but cannot commit the next or a subsequent Government to doing that, even if they intend to go down the road of the GOCO option. Their only legislative requirement would be to do it through affirmative orders going through both Houses. The question of what information they would be required to provide will largely be a matter for the Government of the day. I seriously hope that the Minister will give further reflection to what has been said today about the importance in a major change such as this of making sure that the Government who make this decision—if they decide to go down the GOCO channel—fully justify their decision and the reasons for it, giving the evidence to support the line they want to take.

The Minister said in response to my noble friend Lord Robertson of Port Ellen that he would be happy to hold a meeting to discuss the super-affirmative order or the provisions that might be within it—I hope I am not misinterpreting him. If I have understood that correctly, I would certainly wish to be involved in any such meeting to see if we could make some progress down that road, if that would be acceptable to the Minister. We might reach some sort of accord on it. However, in the mean time our position is that we do not think that Part 1 should remain in the Bill. I mentioned that our amendments in relation to the super-affirmative order were very much the second-best option. Obviously as far as that is concerned, we do not consider the proposal made by the Minister on behalf of the Government in their amendment for two affirmative orders to be adequate. However, I must make a decision on what I do now in relation to Clause 1 standing part. I do not intend to pursue the issue at this stage but, as I am sure the Minister understands, I am keeping our options open as to what we pursue on Report.

Clause 1 agreed.

Amendment 6

Moved by

[Lord Rosser]

6*: After Clause 1, insert the following new Clause—
“Code of conduct
(1) A code of conduct shall be prepared by the Ministry of Defence governing contact between members of the armed forces and Ministry of Defence officials and employees or representatives of defence contractors.
(2) The code of conduct shall contain the following provisions—
(a) employees of the armed forces or the Ministry of Defence at or above the rank of Brigadier General or the equivalent Civil Service grade, shall be prohibited from undertaking paid employment with a defence contractor unless two years or more have elapsed since the termination of their contract with the armed forces or Ministry of Defence;(b) the appointment of an individual as described in subsection (1) by a defence contractor shall be treated as a public appointment;(c) individuals employed under the terms of paragraph (a) shall not, whilst in the employment of a defence contractor, undertake any activity that brings them into contact with the Ministry of Defence;(d) defence contractors shall publish on an annual basis a list of current employees whose appointment was under the terms of paragraph (a);(e) a register of gifts and hospitality shall be published quarterly by the Ministry of Defence;(f) any gift or hospitality to an employee of the Ministry of Defence, member of the armed forces at or above the rank of Brigadier General, or Civil Service equivalent, or spouse or partner of such, of a value greater than £660 from a defence contractor must be placed on the register prepared under paragraph (e).(3) “Defence contractor” means a company, organisation or person whose main business is in the manufacturing or provision of equipment, works or services for defence purposes.”

[Lord Rosser]

Amendment 6 seeks to insert the code of conduct outlined in the proposed new clause. It seeks to address what is sometimes called the “revolving door” issue among Ministry of Defence personnel which can potentially lead to undue influence or access when bidding for MoD contracts.

The matter is relevant to the Bill as many Ministry of Defence staff could have cross-over work with, and come into contact with, the GOCO. There is also the question of whether the revolving door will become a bigger issue than now with the new DE&S+ organisation from April this year which will have greater private sector involvement, greater freedom and flexibilities and be a separate government trading entity.

We would like to see a code of conduct which precludes Ministry of Defence or military personnel of certain rank and above from working for defence contractors, say, for at least two years from the termination of their contract, requires contractors to publish annually a list of employees who have worked for the Ministry of Defence at the specified rank or above, and requires the creation of a register of gifts and hospitality over a certain value. Such a code of conduct would go some way towards slowing down the revolving door between the Ministry of Defence and defence contractors, and also reduce the brain drain or loss of skills in the Ministry of Defence.

Published information, compiled apparently from freedom of information requests, suggests that senior military personnel and former officials from the Ministry of Defence have taken up 3,500 positions with defence contractors since 1996. This trend continues today and clearly is not an issue that relates to a particular Government.

The Advisory Committee on Business Appointments appears to have insufficient influence or power. As rules can effectively be broken, or so it would appear, without sanction, there is surely a case for legislation which will bring greater accountability and transparency to this area. We suggest, as set out in the amendment, a code of conduct with tighter guidelines. I beg to move.

[Lord Astor of Hever]

My Lords, before I address this amendment, perhaps I may reassure the noble Lord that I will write to him, answering as best I can the points he raised. I mentioned the Cabinet Office in my earlier answer.

[Lord Rosser]

Perhaps I may express my regrets. I did not hear it. I accept fully what the noble Lord has said.

[Lord Astor of Hever]

I shall certainly write. I said that officials were in discussions with Her Majesty’s Treasury and the Cabinet Office regarding the nature of the delegations required within the DE&S budget. As far as I am able, I will write as detailed a letter as possible to the noble Lord and make sure that copies are sent to all other noble Lords who have taken part in this Committee. I can reassure the noble Lord, Lord Robertson, that I will organise a meeting to see whether we can come to some meeting of minds. We all want to do what is best for the Armed Forces and for procurement. I shall organise that meeting as quickly as I can.

On Amendment 6, I am grateful for the points raised by the noble Lord. I fully accept the critical importance of protecting the interests and integrity of decision-making within the Ministry of Defence and wider government by maintaining the highest standards of propriety of those Crown servants within the Ministry of Defence, which includes civilian staff as well as members of the Armed Forces, who interact with defence contractors. I believe strongly that the integrity and propriety of those Crown servants who may be in a position to influence decision-making should be seen to be beyond reproach.

However, I must resist the inclusion of the amendment as the issue is already effectively addressed. The code of conduct that the noble Lords wish to include seeks to address general concerns that senior government officials could be perceived to be in conflict or have vested interests when dealing with defence contractors in their day-to-day work. Further, the noble Lord, Lord West of Spithead, in his evidence session of 3 September to the House of Commons, also made mention of Title 10 of the US code, the section of the code relating to the Armed Forces of the United States.

The code of conduct that the noble Lords seek already exists within the Ministry of Defence in two forms. The first is in the form of the business appointment rules, which govern situations in which Crown servants wish to take up a relevant offer of employment within two years of leaving the Ministry of Defence. The second is the gifts, reward and hospitality rules, which govern situations in which Crown servants are offered a gift or hospitality. Together, these two important sets of rules set out the standards of conduct expected of Crown servants within the Ministry of Defence. For civilian officials within the Ministry of Defence, both the business appointment rules and the gifts, reward and hospitality rules are contained within the Civil Service Management Code, which was issued under Part 1 of the Constitutional Reform and Governance Act 2010. For military officials, the rules are contained within the Queen’s Regulations for each of the services, and the provisions of the business appointment rules have been in effect since July 1937.

The Civil Service Code states that civil servants must not accept gifts, hospitality or benefits of any kind from a third party that might be seen to compromise their personal judgment or integrity. The Queen’s Regulations lay down the conduct and procedure to be observed by service personnel on the acceptance of gifts, rewards and hospitality. In all cases, any offers of gifts or hospitality must be registered by the individual in receipt of the offer. The provisions of the business appointment rules for both military and civilian officials differ depending on the seniority of the individual, with the most senior officials requiring permission from the Prime Minister to take up an appointment following the end of their service within the Ministry of Defence.

The specific provisions of the business appointment rules are as follows. For the most senior officials in the Civil Service—at three-star level or their military equivalents—the rules require that they submit an application, which must be referred by the department to the Advisory Committee on Business Appointments, which will provide advice to the Prime Minister to enable a decision to be taken. Due to their role at the highest level of Government and their access to a wide range of sensitive information, all Permanent Secretaries will be subject to a minimum waiting period of three months between leaving paid Civil Service employment and taking up an outside appointment or employment. As a general principle, there will be a two-year ban on civil servants at three-star level and above lobbying the Government—communicating with a view to influencing a government decision or policy in relation to their own interests. For civil servants at two-star level and their military equivalents, the rules require that an application be made to the Permanent Secretary, who is responsible for making a decision and providing a written recommendation to ACOBA—the Advisory Committee on Business Appointments.

[Lord Robertson of Port Ellen]

The Minister was reading rather quickly. Did he say that the quarantine period was to be three months only?

[Lord Astor of Hever]

Yes, I did. I shall be able to answer the noble Lord’s question at the end.

Applications from one-star level and below and their military equivalents are considered internally within the MoD. An application at these levels is required only if the individual’s circumstances mean that, in their last two years of service, they have been subject to one or more of the following: first, they have been involved in developing policy affecting their prospective employer, or have had access to unannounced Government policy or other privileged information affecting their prospective employer; secondly, they have been responsible for regulatory or any other decisions affecting their prospective employer; thirdly, they have had any official dealings with their prospective employer; fourthly, they have had official dealings of a continued or repeated nature with their prospective employer at any time during their civil service career; fifthly, they have had access to the commercially sensitive information of competitors of their prospective employer in the course of their official duties; sixthly, the proposed appointment or employment would involve making representations to, or lobbying the Government on behalf of a new employer; and seventhly, the proposed appointment of employment is consultancy work, either self-employed or as a member of a firm, and they have had official dealings with outside bodies or organisations involved in their proposed area of consultancy work.

The number of applications made under the business appointment rules is relatively modest and has averaged around 200 per year over the past five years across grades 1 to 4. For example, in 2012-13 there were 258 applications, of which 172 were approved with conditions, and the rest approved unconditionally.

17:30

The rules on the acceptance of gifts and hospitality set out that, even where the acceptance of gifts or hospitality is not unlawful, acceptance can still be improper and, in serious cases, may lead to internal misconduct action being taken. This can be a particular risk in the MoD where many areas of departmental activity bring Crown servants into regular contact with outside organisations, and in particular with defence contractors, who may regard it as normal practice or social convention to offer hospitality and, sometimes, gifts.

It is impossible to set out rules to govern every conceivable circumstance in which a gift or hospitality might be offered and accepted. Much will depend on the nature of the relationship between the department and the organisation, and the role of an individual Crown servant in that relationship. However, a number of clear principles are applied to all cases, and intended to enable Crown servants to act with propriety when deciding whether or not acceptance is appropriate. If there is any doubt, the individual is expected to consult with their superiors before accepting any gifts or hospitality. This consultation can be elevated as necessary within the department if there is any unresolved doubt.

Crown servants should have regard not simply to whether they feel themselves to have been influenced but to the impression that their actions could have on others. In instances where acceptance of gifts may be acceptable, they must be deemed to be trivial in nature and non-contentious, and must not exceed £50 in value. Typically, such gifts include items such as pens, diaries, et cetera.

In answer to the noble Lord, Lord Robertson, all Permanent Secretaries will be subject to a minimum waiting period of three months between leaving paid Civil Service employment and taking up any outside appointment or employment.

In summary on this amendment, the extant MoD policy already contains the required protection against perceived conflicts of interest or impropriety that this new clause is seeking to achieve, and it is therefore not needed.

[Lord Robertson of Port Ellen]

I do not want to pre-empt my noble friend, but there is an air of astonishment around the Grand Committee that the Minister said that Permanent Secretaries have only three months before they can take up some paid employment. If that is what is being said, it is a remarkably short period. Who wrote that rule? Was some Permanent Secretary responsible for it? If that is the case, there is a real cause for alarm that junior civil servants are being constrained in a remarkable way but Permanent Secretaries at that level seem to be given a remarkably short period before they can take up a new job. I have to say that I am profoundly sceptical about the operation of the committee on business recommendations, or whatever it is called, because it is completely toothless. It can make recommendations that senior people in government are not obliged to follow. The current record is that quite a few people completely ignore the recommendation and time limits, even the three months that is talked about. Perhaps the Minister would like to explain.

[Baroness Garden of Frognal (LD)]

Can my noble friend clarify whether the minimum three months would relate to an employment which was absolutely nothing to do with the previous work? In practice, people who go to work for defence contractors tend to have to wait considerably longer than three months before they can take up that appointment, do they not?

[Lord Astor of Hever]

My noble friend makes a very good point, which I was just going to mention. The period is three months but obviously, if a Permanent Secretary has any conflict of interest, that would be extended to two years under the normal rules. My noble friend makes a very good point.

[Lord Rosser]

Once again, I thank the Minister for the thoroughness of his reply on the amendment explaining the current situation, which has clearly caused some surprise in relation to some aspects. Clearly, we will want to look at what he has said when we read Hansard. I assume from his reply that the Government as a whole are satisfied with the present arrangements, and that they are being adhered to—and that there is no problem with the rules being broken, which is what I suggested might be the case. It would be helpful if the Minister could confirm that as far as the Government are concerned, there is no significant or worrying breach of the rules. Perhaps he could also comment on the role and effectiveness of the Advisory Committee on Business Appointments, as that is a matter that I and my noble friend Lord Robertson of Port Ellen raised.

I will be withdrawing the amendment, but I hope that the Minister will be able to reply to those points. I am loath to keep asking him whether he will reply in writing, as I appreciate that what he says will appear in Hansard but, bearing in mind some of the concerns that have been raised, it would be helpful if he could put in writing what he said about the distinction between the three-month period, and the circumstances in which that applies; and the two-year period, and the circumstances in which that applies.

[Lord Astor of Hever]

My Lords, I will be very happy to do that; in fact I was going to offer to write to the noble Lord, Lord Robertson, with copies sent to other interested noble Lords. I have been handed a fairly detailed brief on that point. Rather than reading it out, I would like to put it in a letter and address all the concerns that have been raised.

[Lord Rosser]

In that case, I beg leave to withdraw the amendment.

Amendment 6 withdrawn.

Amendment 7

Moved by

[Lord Rosser]

7: After Clause 1, insert the following new Clause—
“Duty of Secretary of State to report to Parliament on increases in cost of defence contracts
(1) Where it is proposed that the total price payable for the provision of goods, works or services, procured from another person for defence purposes under a contract entered into by the Secretary of State, or a contractor acting on behalf of the Secretary of State under the provisions of section 1, should rise beyond that detailed in the original terms of the contract, the Secretary of State shall—
(a) lay before both Houses a report detailing the circumstances requiring the increased price,(b) withhold approval of any adjustment of the total price for the contract until the report has been laid, and(c) write to the chairs of the relevant parliamentary committees indicating that such a report has been laid.”

[Lord Rosser]

This group also contains Amendment 9. Amendment 7 addresses the issue of scrutiny and transparency over increases in the cost of defence contracts, whether entered into by the Secretary of State or a contractor acting on behalf of the Secretary of State. The second amendment provides for scrutiny of financial assistance given to a contractor by the Secretary of State under the terms of Clause 2.

The form of scrutiny provided for in the amendments is parliamentary, through reports to both Houses, and with two other requirements as set out. The Secretary of State would not be able to approve any adjustment of the total price provided for in the contract or provide financial assistance to a contractor unless the required reports had been laid.

With the responsibility for keeping within the original financial terms of the contract likely to become more remote from the Ministry of Defence and the Secretary of State if the provisions of Clause 1 are implemented, there is a need to be precise about what checks and controls will be in place and how Parliament will be kept advised and aware of increases in the cost of defence contracts. Likewise, with the Secretary of State being given power under the Bill to give financial assistance to a contractor on terms and conditions that the Secretary of State thinks appropriate, there is a need to be precise about what checks and controls will be in place over the use of that power and of taxpayers’ money, and how Parliament will be kept advised and aware of how and when the power is being used.

In that regard, perhaps the Minister could give some examples of the kind of circumstances in which this power for the Secretary of State to give financial assistance might be used and is intended under the terms of Clause 2. It would be helpful if the Minister could say whether the new DE&S organisation that will come in from April as a bespoke central government trading entity with greater private sector involvement and new freedoms and flexibilities will lead to any changes in the current arrangements for reporting on or dealing with any increases in the cost of defence contracts or changes in the role of the Secretary of State in that regard. I beg to move.

[Lord Roper]

My Lords, I would be grateful if my noble friend in replying to this debate could give us more information on why Clause 2 is necessary and what sort of financial assistance we are discussing here.

[Lord Astor of Hever]

My Lords, Amendment 7 would require the Secretary of State to withhold approval on any relevant contract price change until a detailed report has been laid before both Houses setting out the circumstances why the increased price is required. The amendment also requires the Secretary of State to write to the chairs of the relevant parliamentary committees, which I assume to be the House of Commons Defence Select Committee and the Public Accounts Committee, telling them that the report has been laid. Although I fully support the principle of being transparent with Parliament regarding the performance of the defence equipment programme, I do not believe that this amendment is appropriate, as it would significantly constrain the operational freedom of the Secretary of State and the department. The amendment is also not required as the performance of the equipment programme is already regularly reported on, including by the National Audit Office, and scrutinised by Parliament.

In addition, the proposal would introduce significant practical issues. Under the proposal, every change of price within a contract managed by the future GOCO would require a report to be laid before both Houses. Given that DE&S manages many thousands of contracts, this requirement could impose an unmanageable burden on the GOCO and the department. Gaining better control over the schedule delivery and cost of the equipment programme is a fundamental part of the likely future GOCO arrangements, and that will not be helped by imposing an excessively burdensome reporting constraint on the GOCO. Indeed, it could result in the opposite effect. The amendment also provides no mechanism for how contract price changes would be approved while Parliament is in recess. It is clearly unreasonable for the day-to-day operation of the department and GOCO in delivering equipment and support to the front line to be constrained in this fashion.

Turning to Amendment 9, it is important to stress that Clause 2 of the Bill is designed as a fallback option to be used as a last resort in circumstances where a GOCO company is in need of financial assistance and unable to obtain it from the commercial market at acceptable rates. We would expect a future contractor to be a financially robust company that would only very rarely need to seek financial assistance from the market and that, should it need to do so, the assistance required would be available on acceptable commercial terms. Therefore, the power to provide financial assistance to the contractor from the Secretary of State is anticipated to be required only in extremely rare circumstances and as a last option to prevent the business from becoming insolvent and ensure business continuity. Clearly, continuity is critical and must be ensured when the business in question is the provision of defence equipment procurement and support services that are vital to supporting our troops on the front line. That risk must therefore be effectively managed. A further important point is that the Ministry of Defence would seek to claw back any financial assistance provided under this clause through deductions from future contractual payments to the GOCO.

The effect of the amendment is to require the Secretary of State to withhold approval for the grant of financial assistance until a report has been laid before both Houses setting out why financial assistance is required and until he has written to the relevant chairs of the parliamentary committees telling them that the report has been laid.

The purpose of this amendment is about ensuring transparency to Parliament—a principle, as I said in my opening remarks, that I fully support. I understand and agree with the desire for Parliament to be kept fully informed and to have the opportunity to consider and comment on the provision of financial assistance from Government funds. However, although the amendment seeks only to constrain the ability of the Secretary of State to provide financial assistance—to the extent that he could not do so until the report has been provided to Parliament—it would have the effect of introducing a time delay to the provision of such assistance, which could have very significant consequences if assistance is required urgently to ensure business continuity.

17:45

A further consideration would be that the content of the report may need to be limited or confidential due to commercial sensitivities regarding the contractor’s financial position. The reporting of such matters is not usually embedded in legislation, but governed through HMT’s Managing Public Money. I draw attention to a similar reporting process within MPM for reporting contingent liabilities, where departments are required to lay them before the House. Where the proposal is more urgent, or the House is not sitting, departments write to the chairs of the PAC and the departmental committee explaining the need for urgency, and as a matter of record provide a Written Ministerial Statement and a departmental minute at the earliest opportunity.

Why would the MoD need to be able to provide financial assistance to a contractor if their financial soundness is part of the contract award process? The answer is that a number of scenarios could arise where, in order to ensure business continuity, it would be advisable for the Secretary of State to have the flexibility to act quickly to secure the capability, but it is not possible to forecast that at this time. What is the likely cost? It is not possible to say that yet: it will become clearer as we go through the commercial negotiation process. That is why the Bill does not include an upper limit on the extent of assistance the Secretary of State could provide. With regard to my noble friend’s two questions, I do not have an answer but will write to him on that subject.

[Lord Roper]

Before my noble friend sits down, could he explain—I thought I understood this but now understand it less—whether the reference in Clause 2 to “a contractor” is to the GOCO contractor or to an individual company that is supplying goods to the Ministry of Defence? That is not totally clear.

[Lord Astor of Hever]

My Lords, I totally agree with my noble friend. Before Committee I had a long debate with the team about this, and we changed my speaking notes radically. We changed “‘contractor” to “GOCO” in many cases. The answer to my noble friend’s question is GOCO, but the terms “contractor” and “GOCO” are interchangeable as far as the Bill is concerned. One can use both when describing provisions in Part 1 of the Bill, but for consistency and clarity we have decided, in my speaking notes, to use the term “GOCO” as far as possible. I note that a “contractor” slipped through the net.

In the light of what I have just said, I need to resist these amendments as unnecessary, and I hope the noble Lords will withdraw Amendment 7 and not move Amendment 9.

[Lord Rosser]

Once again I thank the Minister for his detailed response. I make two brief comments. Clearly the point of Amendment 7 was to seek to ensure that Parliament would still be kept advised on cost increases in defence contracts in the changed circumstances of the GOCO.

In relation to Amendment 9, if I have understood the Minister correctly, one could argue that if there is provision for financial assistance, it would mean that the risk was not being transferred to the GOCO operator but would remain ultimately with the taxpayer. That raises an important issue about the GOCO operator and the proposals: what risk is being transferred? The response given by the Minister suggests that, come the crunch, not much risk at all is being transferred. However, I do not intend to pursue the matter any further, certainly at the moment. I beg leave to withdraw the amendment.

Amendment 7 withdrawn.

Amendment 8

Moved by

[Lord Rosser]

8: After Clause 1, insert the following new Clause—
“Transfer of employees
Employees transferred to a company by virtue of arrangements mentioned in section 1 may not be required to geographically relocate outside of the UK without full and proper consultation.”

[Lord Rosser]

The amendment inserts a new clause after Clause 1 to provide that employees transferred to a company under Clause 1 may not be required to geographically relocate outside the UK without full and proper consultation, which, frankly, one would hope in reality would mean that it would be done only by agreement, although that specific wording is not in the amendment.

There will be an opportunity under later amendments to consider all the possible implications for the employees affected by being transferred to a GOCO contractor organisation, and indeed of being part of the new DE&S organisation after April, with its greater flexibilities and freedoms. However, this amendment deals with a specific issue: the need to provide assurance that staff transferred to a GOCO consortium made up of at least some major international companies will not find themselves being told they must move to a position outside the UK when it is not something they would wish to do, nor would have been compelled to do when part of the current DE&S organisation. I am assuming that this could not happen under the new post-April 2014 DE&S organisation, but it would be helpful if the Minister could confirm that that is the case.

The provisions of the amendment would at least reduce the prospect of such transfers being required against the wishes of the individual concerned. This is not some minor point, because requiring an employee to move abroad is a not unknown way of either removing an employee who has fallen out of favour, or is no longer needed, out of an organisation in the UK, or alternatively if they refuse, out of a company altogether. I very much hope that the Minister will be able to provide some assurance on this point. I beg to move.

[Lord Astor of Hever]

My Lords, going back to the previous amendment, the noble Lord asked me about risk. I can confirm that risk is transferred but must be capped; otherwise no company would bid for a GOCO, due to unlimited liability. The noble Lord may wish to come back on that.

Amendment 8 raises an important issue. I am grateful for the points that the noble Lord raised and I agree that it is important that we protect the interests of those members of DE&S who would be transferred to the GOCO. I believe strongly that the interests of the transferring employees should be protected in the event that the new company should decide to relocate some or all of the services outside the UK. However, I must resist the inclusion of the amendment because it is not needed. Those employees transferring to the GOCO would be sufficiently protected by UK employment legislation in this regard and, accordingly, there is no requirement to include this provision in the Bill.

Noble Lords may recall the note on the Transfer of Undertakings (Protection of Employment) Regulations 2006—SI 2006/246—provided in another place for reference, which explained the protections that those regulations afford to transferring employees. In summary, the TUPE regulations protect employees if the business in which they are employed changes hands, or the services that they provide are to be provided by another organisation. The effect of the regulations is to transfer employees and any rights, powers, duties and liabilities associated with them from the old employer to the new employer. This includes any rights specified in their contract of employment, statutory rights and the right to continuity of employment. Additionally, the new employer cannot change the terms and conditions of employment of transferred employees if the sole or principal reason for the change is the transfer. This is also the case where the sole or principal reason is connected to the transfer, unless there is an ETO reason for the change, usually requiring a change in number of the workforce. This often makes it difficult, if not impossible, for new employers to amend terms and conditions of employment of staff immediately after a TUPE transfer.

The fact that this Bill makes it clear that the TUPE regulations would apply to the transfer of employees to the company would have the effect of protecting the employees’ terms and conditions of employment in place at the point of transfer, as well as representational rights. The terms of employment that will be protected include any obligation with regard to mobility. Civil Service terms and conditions of employment generally contain a mobility obligation within the UK and abroad for all but the most junior of grades. Some employees who would transfer to the GOCO will have, on previous occasions, relocated for work-related reasons both within the UK and abroad throughout their career in the Civil Service. Any proposed change of work location would be subject to general employment law constraints, which require that any enforcement of a mobility obligation must be fair and reasonable, dependent upon the personal circumstances of the individual concerned.

Noble Lords will be aware that amendments to the TUPE regulations came into force last week, and those amendments will not have a detrimental impact on employees. Further to the protections afforded to employees by the TUPE regulations, part IV of the Information and Consultation of Employees Regulations 2004 (SI 3426/2004) places a general obligation on employers to provide information to, and consult, employee representatives. Consultation is the process by which management and employees or their representatives jointly examine and discuss issues of mutual concern. It involves seeking acceptable solutions to problems through a genuine exchange of views and information. Consultation does not remove the right of managers to manage—they must still make the final decision—but it does impose an obligation that the views of employees will be sought and considered before decisions are taken.

To comply with their obligations under the ICE regulations, employers must provide relevant information to, and consult employee representatives on, all matters in relation to: first, recent and probable development of the undertakings activities and economic situation; secondly, the situation, structure and probable development of employment within the undertaking and on any anticipatory measures envisaged—in particular, where there is a threat to employment within the undertaking; and, thirdly, decisions likely to lead to substantial changes in work organisation or in contractual relations. The information must be provided at such time, in such fashion and with sufficient content as are appropriate to enable the representatives to conduct an adequate study and prepare for consultation.

Furthermore, any consultation must be appropriate in terms of timing, method and content, and conducted with a view to reaching agreement on decisions within the scope of the employer’s powers. In other words, the employer must ensure that any consultation that is conducted must be meaningful, and commensurate to the change which is being consulted on. For example, if an employer were planning to move their current premises to a new building half a mile from where they were currently located, with no effect on working practices or workforce numbers, it could be deemed that the impact of this change would be minimal and, accordingly, a minimal time period of consultation of two to three weeks would be appropriate. However, if the proposal were to relocate to new premises at the other side of the UK, or even abroad, this would have a significant impact on the workforce and a period of two to three months would probably be deemed more appropriate.

I do not have an answer to the noble Lord’s question, except “confirmed”, and I would need to pad that out in the form of a letter to him. In summary, established UK employment legislation provides the required protection to the employees that this new clause is seeking to achieve and I therefore ask the noble Lords to withdraw their amendment.

[Lord Rosser]

I thank the Minister for his detailed and considered response, which I will read carefully in Hansard. In the mean time, I beg leave to withdraw the amendment.

Amendment 8 withdrawn.

Clause 2: Financial assistance

Amendment 9 not moved.

Clause 2 agreed.

Clauses 3 and 4 agreed.

Schedule 1 agreed.

[Lord Astor of Hever]

My Lords, this may be a convenient moment for the Committee to adjourn.

Committee adjourned at 6.01 pm.