Draft Single Source Contract (Amendment) Regulations 2018
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The Parliamentary Under-Secretary of State for Defence (Mr Tobias Ellwood)
I beg to move,
That the Committee has considered the draft Single Source Contract (Amendment) Regulations 2018.
It is an unexpected pleasure, Mr Bailey, to be in the position of moving the motion, but it is nevertheless an honour.
The Ministry of Defence spends some £8 billion a year through contracts that are not competed. Given the lack of competitive pressure, the Government need to find alternative ways of ensuring that the MOD obtains value for money on those contracts while protecting the long-term future of the defence industry by ensuring that suppliers get a fair return on single source work.
Lord Currie produced an independent report on non-competitive defence procurement in 2011. He concluded that the arrangements then in place were simply unfit for purpose. The result was a weak negotiating position for the Department and poor value for money for the taxpayer. As a consequence, the Government introduced a new framework through the Defence Reform Act 2014. Our intention was clear: the new framework set out firm rules on pricing single source defence contracts and shifted the onus on to suppliers to demonstrate that their costs are “appropriate, attributable and reasonable”. Where there is a dispute, either party can refer the matter to an impartial adjudicator—the Single Source Regulations Office—for a binding decision.
Since coming into force in December 2014, the new framework has made significant progress. Contracts worth more than £19 billion have been brought under the framework and the benefits to the MOD have been considerable, including a reduction of the baseline profit rate from more than 10% in 2014 to 6.8% this year. However, any new regime of this complexity needs to be refined in light of experience. The 2014 Act therefore required the Secretary of State to carry out a thorough review of single source legislation within three years of it coming into force. The review was completed in December 2017, and it identified several potential improvements to the framework. We have incorporated the first of those into the regulations, and we plan to introduce further amendments to Parliament later this year.
The Joint Committee on Statutory Instruments has stated that the MOD has failed to comply with proper legislative practice by not offering the regulations under the free issue procedure. The Department had taken the view that the main purpose of the regulations was to introduce enhancements to the existing regulations by changing the definition of exclusions. It believed that the aspects of the regulations that clarify aspects of the original regulations, and hence would cause them to be issued free of charge, would not have been sufficient to justify producing a new statutory instrument. However, in light of the Joint Committee’s views, we are happy to make the regulations free of charge when they are published.
The main amendments under consideration relate to the types of single source contracts, known as “exclusions”, that cannot become qualifying defence contracts. MOD policy remains to maximise the value of single source contracts covered by the framework to secure the highest level of benefits. For that reason, it is important that exclusions are defined as narrowly and precisely as possible to ensure that as many contracts as possible are eligible under the regulations.
However, experience in implementing the framework has shown that there is confusion about how to apply some of the exclusions and that contracts relating to intelligence and international co-operative programmes are being unnecessarily excluded. We are therefore proposing a clearer and more precise definition of the two categories. We estimate that that could result in up to a further 8% to 10% of single source spend coming under the regulations.
We are also adding a further category of exclusion to deal with situations where contracts are transferred from one legal entity to another, such as where an internal restructuring of an industry has taken place. In such cases, although the legal identity of the supplier may have changed, the contract has not otherwise changed in a material sense. We have engaged extensively with stakeholders in drafting these amendments and believe that the proposals will be welcomed by suppliers as offering greater clarity on definitions of exclusions and therefore reducing the degree of confusion. I hope the regulations will gain the Committee’s approval.
Mr Ellwood
Thank you, Mr Bailey—I was waiting for the deluge of other Back Benchers leaping to their feet to participate in this important debate.
I thank the hon. Member for Caerphilly for his comments and his perspective on the resignation of the former Minister, my hon. Friend the Member for Aberconwy (Guto Bebb). We all wish my hon. Friend well and thank him for his service and what he did. The hon. Member for Caerphilly sought perhaps to make fun of the fact that he had resigned, but the Government are yet to match the more than 100 resignations we have seen in the Opposition. There is one Member sitting on the Opposition Back Benches now who resigned. If we want to compare notes on resignations, Labour should perhaps keep quiet.
Wayne David
As the Minister specifically referred to me, I thank him for giving me a chance to reply. Yes, I did threaten to resign, but I actually did resign, unlike the Minister, who has threatened to resign but has not done so. Nothing has changed—he is all talk.
Mr Ellwood
The hon. Gentleman says he resigned. As far as I can see, he is still on the Front Bench, so I do not know where his resignation took him. Obviously it did not have the impact he wished. Perhaps his services were desired again because so many others had resigned that the Opposition needed a chance to revisit some of them, saying, “Please come back, because we have got nobody else.” Before we go any further down that cul de sac, shall we return to the business at hand, Mr Bailey?
The Chair
Mr Ellwood
I am pleased to gain your approval.
The hon. Member for Caerphilly wished me well in momentarily taking over this portfolio. Like many of us with a desire to see the best for defence, for our armed forces and for Britain, I take a huge interest in the procurement process. I certainly feel able, competent and enthusiastic to step into the shoes of the former Defence Procurement Minister.
The hon. Gentleman spoke about investment in procurement and touched on the fact that there is to be some £180 billion of investment over the next 10 years. That is an indication of the Government’s commitment. We want to see an advance in equipment for our armed forces to ensure that we remain a tier 1 nation when it comes to our defence posture. That is partly why we undertook a capability review and the defence modernisation programme, which is coming to its conclusion.
The hon. Gentleman asked a number of questions, particularly about why we have single source contracts. There are two principal reasons for that. First, some of the major procurement contracts, such as submarine build, simply go to a single contractor. There is only one that steps forward, perhaps for security reasons or otherwise, so there will be a single source in those cases. In other cases, perhaps at smaller levels, the economic supplies limit who steps forward, such as with our maritime patrol aircraft. Nevertheless, I hope he appreciates that there is not always the competition we want. If there is not the competition, we should have robust rules to ensure that taxpayers’ money is properly spent.
The hon. Gentleman talked about the impact on businesses. There are a number of impacts. First, there is value for money, where we have seen in the percentage drop in the baseline profit rate that I mentioned in my opening comments. We have more efficient procedure, and there is less confusion as to what the process is. There is no negative impact on business—that is what the guidelines were hinting at. The measure will not require any further red tape for business to be concerned about.
The hon. Gentleman talked about the Command Paper. We are preparing that now simply because it is part of the thoroughfare of business that we need to get through. We do not wish to wait until the autumn. I certainly hope that the Command Paper will be published as soon as possible. It is part of the wider timetable that we must honour, which is about joined-up Government and ensuring that we meet our responsibilities. That is why the regulations are being put forward today.
The hon. Gentleman put a couple of other detailed questions to me, on which he invited me to write to him. If I may, I will do exactly that. With that, I seek the Committee’s approval for the regulations.
Question put and agreed to.