Better Defence Acquisition

Lord Arbuthnot of Edrom Excerpts

Monday 10th June 2013 Commons Chamber

[Mr Hammond]

I am grateful to the right hon. Gentleman for his welcome of this announcement. Of course I completely accept that the Opposition’s willingness to look at the issues with an open mind is not the same as an uncritical endorsement of the GoCo concept, and just in case I did not make this clear in my opening remarks, we have not yet accepted the GoCo concept as the chosen outcome; we are conducting an assessment. However, I think we agree across the House—Opposition Members who have, in office, experienced the challenge of trying to make the defence budget add up will certainly agree—on the need for change. The intentions are very clear.

The process that we are talking about was kicked off by the Gray report, published in 2009. I note that the then Secretary of State has strongly endorsed the GoCo model, which he feels is the way forward. We are examining the case for GoCo against the baseline of DE&S+. We have two separate teams, working with Chinese walls between them, that are equally resourced. One is trying to build the maximum fully-public-sector case that it can, taking advantage of all freedoms and flexibilities available. The other is working with potential GoCo bidders to look at the value that they can deliver. At the end of the process, we will make a comparison.

The right hon. Gentleman talked about the cost drivers from past scope creep. One of the clear advantages of changing the way that DE&S works is creating a harder boundary between the customer and the company supplying the requirements, making it less easy for scope to creep without a proper change process and proper recognition of the costs involved. He asked me whether the baseline would be re-costed. We do not anticipate a re-costing of the programme baseline. If we go down the GoCo route, we will negotiate with GoCo bidders for an incentivised fee structure, based on the existing costed programme. He will know that an independent cost advisory service sits alongside DE&S, and will play a continuing role in independently assessing the costs of projects and the appropriate level of risk to be attached to them.

Unsurprisingly, the right hon. Gentleman asked me about staffing levels in a post-GoCo DE&S, if GoCo is the selected solution. The staffing transfer would be made under the TUPE regulations. We anticipate about 8,000 of DE&S’s projected 14,500 2015 staff numbers transferring to the new entity, with the remainder—in naval dockyards, logistics, communications, and information services—remaining in other parts of Government, or being outsourced.

There is no reason to suppose that the GoCo route is more likely to deliver further staffing reductions than any other route. Clearly, the new management team, whether it is a GoCo or DE&S+, will seek to run the business efficiently, and to use the freedoms and flexibilities available to it to deliver outputs as effectively as possible.

The right hon. Gentleman asked me about the ratio of military to civilian personnel in DE&S. At present about 25% of the personnel in DE&S are military. We expect the military role, which will be performed by secondees in the future, to focus on providing specifically military advice to the DE&S organisation, rather than filling line management and project management roles, so I do not expect the military proportion of staff to increase, and it may decrease under a future model.

The right hon. Gentleman asked me a question, the motivation for which I entirely understand, about senior officials. Nobody wants to see such exercises becoming a gilded exit route for senior officials, and I am pleased to be able to tell him that the Chief of Defence Matériel, the most senior official in DE&S, will transfer to the MOD side—the customer side—of the equation and will be responsible for designing and managing the customer side. I cannot, as the right hon. Gentleman knows, give him an absolute assurance that other officials in the Department, should they choose to leave the Department, would not at some point in the future be able to join a GoCo, but of course there are rules and restrictions in place—a Cabinet Office regime which has been reinforced following revelations in The Sunday Times last year—and we will make sure that nobody is able to abuse this process.

The right hon. Gentleman asked me whether the GoCo would cover the nuclear deterrent. It will certainly cover the procurement of Vanguard replacement submarines. The management of our nuclear warheads is carried out by the Atomic Weapons Establishment, itself already a GoCo. We have not yet finally decided whether the new GoCo, if there is one, will be responsible for managing the MOD’s relationship with AWE or whether that will be managed directly. That will be one of the issues dealt with in negotiation with potential GoCo bidders.

On timescale, I can tell the right hon. Gentleman that we expect to reach a decision in the summer of next year, with a view to the new arrangements, whether GoCo or DE&S, being stood up before the end of 2014.

Finally, I turn to the question of risk ownership. This is an important point which has been somewhat misunderstood by some commentators. Clearly, it would be very attractive to think that we could transfer the programme risk in the defence equipment programme—£160 billion of it—to somebody in the private sector, but the reality is that there is nobody who has a balance sheet big enough, probably anywhere in the world, and the taxpayer would not be prepared to accept the price for taking on that risk, so the risk ownership in the programme will remain with the Government and the taxpayer. What the private sector partner will be at risk for is his fee, which will be structured in such a way as to incentivise the delivery of the key performance indicators that will be agreed with the partner during the negotiation process. That will be designed to align the GoCo partner’s incentives with the interests and priorities of the Department. That is where a great deal of our time and energy is being invested at present.

[Mr James Arbuthnot (North East Hampshire) (Con)]

What discussions has my right hon. Friend had with key allies, notably the United States and France, about this proposal and what has been their response?

[Mr Hammond]

I thank my right hon. Friend for a very important question. We have had discussions with key allies, notably the United States and France. The United States, contrary to some media reporting, is relaxed about this process. It recognises that there will be some technical issues that we need to resolve, but I am glad to be able to tell him that the Chief of Defence Matériel received this morning, by coincidence, a letter from his counterpart, the Under-Secretary for defence procurement, in the Pentagon confirming that the United States is confident that it will be possible to make these arrangements work. We have set up a joint working group to work through the issues that will need to be addressed before a decision is made.