Single Source Contract (Amendment) Regulations 2018

Earl Howe Excerpts

Monday 9th July 2018 Lords Chamber

Moved by

[Earl Howe]

That the draft Regulations laid before the House on 4 June be approved.

Relevant documents: Special attention drawn to the instrument by the Joint Committee on Statutory Instruments, 28th Report

[The Minister of State, Ministry of Defence (Earl Howe) (Con)]

My Lords, a substantial proportion of the MoD’s annual procurement spend, amounting to some £8 billion a year, goes on single-source contracts. Given this level of expenditure, it is critical that the department obtains value for money. It is also critical that we protect the long-term future of the defence industry by ensuring that suppliers get a fair return on single-source work.

When the noble Lord, Lord Currie, produced his independent report on non-competitive defence procurement in 2011, he concluded that the arrangements then in place were simply unfit for purpose. The result was a weak negotiating position for the department and poor value for money for the taxpayer.

Following the noble Lord’s report, in 2014 we introduced a new framework as part of the Defence Reform Act. Our intent was clear: the new framework sets out firm rules on pricing single-source defence contracts and puts the onus on suppliers to demonstrate that their costs are “appropriate, attributable and reasonable”. Where there is a dispute, either party can refer the matter to an impartial adjudicator, the Single Source Regulations Office, for a decision.

Since coming into force in December 2014, the new framework has made considerable progress: more than £19 billion-worth of single-source contracts have been brought under the framework, and the benefits to the MoD have been significant.

However, any new regime of this complexity needs to be refined in the light of experience. The Act therefore requires the Defence Secretary to carry out a thorough review of single-source legislation within three years of the framework coming into force. This review was completed in December 2017 and several proposals were identified as potential improvements to the framework. We have incorporated the first of these into the SI under consideration, but we plan to introduce further amendments later in the year.

The main amendments under consideration here relate to those types of single-source contract, known as “exclusions”, which cannot become qualifying defence contracts. Experience in implementing the framework has shown that there is some confusion about how such exclusions are applied and that some contracts, relating to intelligence and international co-operative programmes, are being unnecessarily excluded. We therefore propose a clearer and more precise definition of these two categories.

We are also adding a further category of exclusion to deal with situations where contracts are transferred from one legal entity to another, such as where an internal restructuring of industry has taken place. In such cases, although the legal identity of the supplier may have changed, the contract itself has not otherwise changed in a material sense.

We have engaged extensively in drafting these amendments and believe that the proposals will be generally welcomed by suppliers. I beg to move.

[Baroness Smith of Newnham (LD)]

My Lords, I am grateful to the Minister for introducing this statutory instrument and apologise for arriving momentarily after he started. He mentioned that the changes introduced in 2014 were intended to improve value for money and MoD procurement arrangements in general and that, since then, £19 billion had been spent using the single-source procurement mechanism. Will he explain a little more how the changes proposed in the SI will benefit the MoD and the taxpayer? I heard him say that the changes will be of benefit to the supplier. While we do not want to do down the suppliers, it would be helpful to understand how the changes will benefit the taxpayer as well.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting the regulations. Part 2 of the 2014 Act and the subsequent Single Source Contract Regulations 2014 are supported by these Benches. Unfortunately, I have lived through every bit of their creation and evolution. The key thing is: are they effective? The way to judge their effectiveness is, first, to understand the mechanisms, which the Minister has been invited to expand on, and, secondly, to look at how extensive they are. Does the Minister have at hand how much is being spent on equipment and infrastructure in a typical year, say, 2017-18? How much of that is single sourced? I believe the answer is nearly half. What proportion—and this is the key issue—are qualifying defence contracts? I wonder if he has similar figures for contracts with BAE.

The Explanatory Memorandum says that three of the five categories are “working well”, meaning that they describe the exclusions clearly. Two relate to land, I believe, and the third to government-procured equipment. Three are new or modified. The first, Regulation 7(b), is where there is international co-operation. The modification is that there should not be an exclusion if all parties agree. I have great trouble working out why parties would want to agree, because the mechanism is designed to give the Government, the SSRO, the MoD or whoever a better understanding of what is happening in the contract, giving them rights to challenge the suppliers. Why would anybody want to agree to this? Have any firms actually agreed to this?

The second modification relates to “intelligence activities”. This is clearly a case of unintended consequences because all intelligence activities are currently excluded. This turns it on its head to require only those contracts that are a risk to national security to be automatically excluded. Paragraph 7.9, I think, of the Explanatory Memorandum effectively defines “risk to national security”; that is, reports that would normally be required by the SSRO would contain information above a certain security level. Am I right in that understanding? Am I right that the key test will be the security level of the information that the SSRO would naturally demand if they became qualifying contracts? Otherwise, how is national security defined and who defines it?

The final modification relates to what one might loosely describe as novation. That does not give me any pain at all.

The key question about the modifications is: how many more, or what greater proportion of, single-source contracts will be brought into the ambit of the Single Source Regulations Office by these changes? Will the number be trivial or substantial? My final question relating to the order is: when will the MoD respond to the other SSRO recommendations?

Lastly, I have a question that is completely out of order. I point out to the Minister that the NATO summit is, I think, on Wednesday and Thursday. Will he give some indication of when he will give an overview of the defence modernisation programme promised before the NATO summit?

[Earl Howe]

My Lords, I am grateful to the noble Baroness and the noble Lord for their general support for these regulations, and for their questions. The noble Lord, Lord Tunnicliffe—if I may address his questions first—asked about the level of MoD procurement spend for the last full financial year and the level of single-source procurement within that. In the last full financial year, 2017-18, the MoD spend on procurement was just over £24 billion, of which just over £8 billion went on single-source contracts. We do not track the value of defence qualifying contracts on a year-by-year basis, but I can confirm that since the framework came into force in December 2014, up until the end of May 2018, a little over £19 billion-worth of single-source contracts have been brought under the framework. For the same financial year, the MoD placed contracts worth more than £3.6 billion with BAE systems—about which the noble Lord asked me specifically—of which around £3 billion were on single-source contracts. I am afraid I cannot disclose the proportion of the single-source spend covered by the SSCR framework because it is commercial in confidence.

The noble Lord and the noble Baroness, Lady Smith, asked how much the department expects this situation to change as a result of these regulations. We have identified approximately 8% to 10% of single-source spend which we would seek to bring under the regulations as a result of this amendment, subject to the consent of the suppliers in question. Obviously, before the contracts are signed, it is a bit difficult to quantify the amount of money that we expect to save, but I hope that that gives a rough order of magnitude to both noble Lords.

[Lord Tunnicliffe]

Is that an 8% to 10% increase in the contacts which become qualifying, or is it a 50% increase in those that qualify? If the noble Earl does not know, I am perfectly happy to wait for a letter.

[Earl Howe]

I will vouchsafe to the noble Lord that my note is ambiguous on that point and I think, therefore, that I should write to him. We have identified 8% to 10% of single-source spend, which makes it more or less clear that we are talking about single-source spend as a whole rather than that proportion of the spend that comes within the framework. But I will confirm that.

The noble Lord asked me about the exclusion relating to international co-operative programmes which would require the consent of the suppliers involved. He made a very good point about obtaining consent, which was a matter on which we deliberated long and hard. We came to the conclusion that to remove supplier consent altogether would mean that we would have to seek agreement with partner nations, which in practice might sometimes be difficult to achieve. We believe that this proposal represents a pragmatic approach. In fact, we are reassured to note that such agreement on several large contracts has already been achieved with the supplier. Since the framework came into force in December 2014, 11 contracts have been made into qualifying defence contacts on amendment—that is, with the consent of the supplier in question—with a total value of more than £10 billion. The background to that is that many suppliers recognise that the Government are fully committed to implementing the framework and accept that it is in their long-term interests to co-operate with it.

The noble Lord asked me about how the intelligence exclusion would work in practice. Under current legislation, single-source contracts relating to “intelligence procurement” would be excluded from the framework. The problem with that is that experience has shown that there is confusion over exactly how this definition is applied. That is why we have proposed the amendment. Under this change, single-source contracts would be excluded where complying with the single-source legislation would involve having to release information to the SSRO that it is not authorised to see. That significantly raises the bar required for exclusion.

It might be easiest if I gave a hypothetical example. It may be that we sign a single-source contract allowing us access to a specific port overseas in support of a sensitive operation. If this becomes a qualifying defence contract, the reporting requirements under the framework would mean disclosing to the SSRO who the contractor in question was. That would very quickly reveal the location and the likely purpose behind the contract. It is that aspect that we wish to keep classified because of the risk of a negative impact on national security.

The noble Lord asked me when we will respond to the review of single-source legislation. I can tell him that when my right honourable friend the Secretary of State completed his review of single-source legislation last December, several proposals were identified which could improve the operation of the framework, but he asked officials to carry out further work on how these might be implemented, so as to avoid any unintended consequences. Part of that included an extensive process of cross-Whitehall engagement to ensure a fully joined-up position, as well as additional engagement with key stakeholders to take forward the proposals. That work is nearing completion, and we expect to publish our full response shortly.

Finally, on the noble Lord’s last question about the NATO summit and when we expect to announce headline figures from the modernising defence programme, unfortunately, I cannot promise anything this week—contrary to the hopes that I and others have expressed at similar previous occasions. We are endeavouring to make the delay in the announcement as short as possible, and I shall be sure to give the noble Lord as much warning as possible before that event.

Motion agreed.