Defence Procurement

Lord Hammond of Runnymede Excerpts

Tuesday 10th December 2013 Commons Chamber

[The Secretary of State for Defence (Mr Philip Hammond)]

With permission, Mr Speaker, I should like to make a statement on the Government’s plans for reform of defence procurement. The 2010 strategic defence and security review set out the Government’s vision of an agile armed forces designed to face the challenges of the 21st century. Central to delivering and sustaining that vision is the ability to procure and support the equipment the armed forces need. There is widespread acceptance that the present defence acquisition process is not good enough. While there have been notable successes, there have also been many examples of poor performance and sub-optimal outcomes for the armed forces and the taxpayer. Bernard Gray’s report for the previous Government identified three root causes of those problems: an overheated programme; a weak interface between Defence Equipment and Support and the rest of the MOD, too often leading to repeated changes to the requirement; and a lack of business skills in DE&S. This Government have moved to address all three.

In May 2012, I announced that we had resolved the £38 billion black hole we inherited and balanced the defence budget, with more than £4 billion of centrally held contingency to address risks as they crystallised and a much more disciplined and formalised approach to investment approval, committing funding only when project proposals were properly mature. As a consequence, DE&S effectiveness is no longer undermined by an overheated programme. We have also strengthened and improved the interface between DE&S and its MOD customers. We have accepted and implemented the recommendations of Lord Levene’s report on defence reform more clearly to define the customers of DE&S as the front line commands, and to give them substantial responsibility for managing their own budgets and prioritising their requirements. We still have further to go, but we can already see an improvement, and with a substantial reduction in the number of changes to requirements, that is already becoming less of a negative factor in DE&S performance.

We have also started to address the business skills gap within DE&S, through the appointment of Bernard Gray as the Chief of Defence Matériel, and by the recruitment of new senior finance and commercial staff from the private sector. We are beginning to see evidence of progress, and while I do not want to pre-empt the major projects review report that the National Audit Office will publish in the new year, I am confident that it will show significant improvement in respect of the period since we balanced the budget in May 2012.

We recognise, however, that there is still a long way to go. The reforms we have already instituted are only a start, and the challenge of recruiting and retaining the necessary business skills in DE&S is growing, not diminishing, and is likely to get bigger still as the economic recovery gathers pace. A more radical reform of DE&S is necessary if it is to sustain the skills it requires to support our armed forces effectively. That is why we developed the matériel strategy programme.

To address the skills challenge and improve delivery of complex programmes, DE&S needs the freedom to shape its work force to be world class and to engage effectively with the best of the private sector.

The matériel strategy is about removing the obstacles to bringing in critical skills and exploiting the capabilities of the private sector, by exploring alternative models for DE&S. I announced in April that the Government had concluded that a Government-owned, contractor-operated model, a GoCo, might well be best placed to deliver the changes required in DE&S, but that we needed to test the market’s appetite for that model and confirm that it would, indeed, deliver value for money, through a competition. In parallel, I announced that we would work up a public sector comparator, exploring the maximum extent of flexibility that could be achieved within the public sector—a model that we have called DE&S plus. The Government have maintained an open mind as to which option would prove, overall, to deliver the best balance of risk and potential reward once bids are received.

On 19 November, I informed the House that we had reached the detailed proposals stage of the competition, with only one proposal being received from the two consortia remaining in the process. That proposal was from the Bechtel-led Materiel Acquisition Partners. I further informed the House that the Government would consider carefully how best to proceed in the light of this development. I can confirm to the House today that I have decided not to continue the present competition.

The heart of our approach was to test the market’s appetite for delivering a GoCo along the lines we had set out, using the competitive process to drive innovation and value. We have always recognised that there are risks inherent in the GoCo approach. With only one bidder remaining in the competition at this stage, I have had to make a judgment about whether the public sector comparator alone would generate sufficient competitive tension to ensure an effective outcome for the armed forces and value for money for the taxpayer.

I wish to place on record the fact that Materiel Acquisition Partners has engaged effectively with the very challenging brief we set out. It has presented us with a credible and detailed bid, but we do not have a competitive process. I have therefore concluded that the risks of proceeding with a single bidder are too great to be acceptable.

We have gained many valuable insights from bringing the proposition this far and understanding the issues raised by both bidders and potential bidders. My conclusion is that a GoCo remains a potential future solution to the challenge of transforming DE&S, but that 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 are clear that the only realistic prospect of resolving the challenges facing DE&S in an acceptable time scale is through a significant injection of private sector skills. I have therefore decided to build on the DE&S plus proposition, transforming DE&S further within the public sector, supported by the injection of additional private sector resource, thus ensuring that the organisation becomes “match-fit” as the public sector comparator for a future market testing of the GoCo proposition.

To do this, we will recognise the unique nature and characteristics of DE&S as a commercially facing organisation by setting it up as a bespoke central Government trading entity from April 2014; we will give the new entity a hard boundary with the rest of MOD, a separate governance and oversight structure with 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—delivering another of Levene’s recommendations; and, crucially, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury and Cabinet Office, around how it recruits, rewards, retains and manages staff along more commercial lines, to reflect its role of running some of the most complex procurement activity in the world. We will of course consult trade unions on the practical arrangements for implementation.

These changes will reinforce the customer-supplier interface between the military command customers and DE&S, facilitating a more business-like approach, allowing us to move earlier to a hard-charging regime and thus further addressing one of the weaknesses identified in the 2009 Gray report. They will allow DE&S to procure crucial private sector input through a series of support contracts to deliver key changes to systems and processes, and to strengthen programme management while organic capabilities are built. They will also permit the recruitment into DE&S of key commercial and technical staff at market rates and with minimum bureaucracy.

Bernard Gray has agreed to become the first chief executive of the new trading entity, thus providing a vital thread of continuity between the original Gray report and the continuing DE&S reform agenda. Alongside the changes to DE&S, we will continue with the reform of the MOD’s wider acquisition system, which is focusing on up-skilling our customer capabilities—a key role for our military, alongside the important role it will continue to play within DE&S.

These changes will drive significant incremental improvements in DE&S as well as delivering the mechanisms that will give the organisation a robust performance baseline. That will allow the MOD, at a future date, to re-test the market’s appetite for continuing the DE&S evolution into a GoCo, and its ability to deliver value for money against a significantly enhanced public sector comparator. On both counts, this course of action represents the best way forward, both for our armed forces and for the taxpayer, and I commend this statement to the House.

[Vernon Coaker (Gedling) (Lab)]

I thank the Secretary of State for advance and early sight of his statement.

For the second time in a few weeks the Secretary of State has been forced to come to the House to explain and clarify, and reassure Members about, key components of his Defence Reform Bill, which will be read for a Second time later today in the other place. This is the statement that the Defence Secretary did not want to make and did not think he would have to make. His flagship policy on defence procurement has come crashing down around him—not so much GoCo or DE&S plus, but a no-go and D-minus for the Defence Secretary. It is another embarrassing U-turn from the Government.

Will the Defence Secretary tell us when he decided that he could no longer proceed with plans for a Government-owned, contractor-operated model for Britain’s defence procurement? It is three weeks since the Portfield consortium withdrew from the GoCo process. Why has it taken so long for the Government to bow to the inevitable and admit the difficulty of proceeding with only one bidder?

The Secretary of State is in danger of making a bad situation worse by what he has announced today. The Government cannot run Britain’s defence and national security on an ad hoc basis. They cannot make it up as they go along. But is it not clear today that that is exactly what the Government and the Defence Secretary are doing? Why is this the first time that we have heard of this new proposal? What consultation has he had on his new proposed model? When and how will Parliament be able to scrutinise these proposals? What resources did he allocate, and when did he allocate them, to ensure the expertise and time to test the model for robustness and make sure it was properly costed and tested for viability and sustainability? When he talks about new freedoms and flexibilities, what exactly does he mean? What was the process for appointing the chief executive of the new trading entity? Can he update us on what discussions he has had with the Treasury about his new proposal and when they began? This is a mess, and it poses more questions than it gives answers.

Does the Secretary of State really expect the House and the country to think that this is anything other than a last-ditch attempt to rescue what is left of the Government’s credibility, and to try and hide the shambles and chaos that are engulfing the Ministry of Defence? The House need not take my word for that. Last Thursday, Lord Levene published his second annual review on the implementation of his defence reform report. The Secretary of State heralded it as a triumph for his political leadership. But can he explain why he failed to mention one significant part of what the report said about the issue of procurement? Lord Levene said:

“In my opinion, the quickest and most straightforward solution would seem to be via ‘DE&S plus’, and this needs to be developed to the very highest standards as a realistic option.”

Does the Secretary of State now agree with Lord Levene? He says that GoCo is a potential future solution. Is it on the table or off the table? Which is it? What will be the repercussions for part 1 of the Defence Reform Bill?

The Opposition support a DE&S plus model and have expressed similar sentiments on the record to Lord Levene. We were, and are, conscious of the need to reform Britain’s defence procurement. We want the best of the private sector to work alongside the best of the public sector, but we need to see more detail on the proposed DE&S plus model. To date, it has been the poor relation in the whole process. When will the Secretary of State provide that detail? Will he accept that throughout the Committee stage of the Bill we consistently raised poor management of the process and serious concerns about viability? Will he accept that it was wrong for Ministers to continue to insist that everything was fine when it clearly was not? That complacency and unwillingness to listen has cost the British taxpayer millions of pounds. We have been here before with the debacle over the aircraft carriers. Despite his waste and complacency, he repeats the £38 billion figure, which has never stood up to scrutiny.

Will the Secretary of State tell us exactly how much this has all cost and what further costs are envisaged? What discussions has he had with the remaining consortium, led by Bechtel, before making today’s statement, and what is its position? Is it eligible for compensation? What discussions has he had with his senior civil servants and the staff at Abbey Wood, who today must be feeling undervalued and demoralised, having seen colleagues made redundant because they were not needed, only for them to be re-employed as agency workers?

The Government could have pulled back from the brink. They could have taken the advice of distinguished military figures, senior figures from the defence industry, former Ministers from across the political spectrum and, yes, the Opposition. How and why did the Government get it so wrong? Given that, how can we have any confidence in the credibility, rigour and independent analysis that the Defence Secretary claims for his updated proposals? Is it not the case that the Government have wasted three years and millions of pounds in time and money? The Secretary of State must come forward with plans that stand up to scrutiny and are made clearly, concisely and rationally. Only then can we ensure the best way forward for much-needed reforms to defence procurement.

[Mr Hammond]

That was predictable stuff. The hon. Gentleman claims that we have wasted three years. When it comes to reforming defence procurement, his lot are responsible for wasting 13 years. If I can give him a bit of friendly advice, I would be very careful about using the words “debacle” and “aircraft carrier” in the same sentence if I was sitting on the Opposition Front Bench. Let us remember that it was his Government who, by delaying the programme for two years to manage an in-year cash-flow crisis, drove £1.6 billion of cost into it.

The hon. Gentleman tells us that the Opposition support the DE&S plus model, but until now they have supported the competition, which is exactly what we propose to do. The former Labour Defence Secretary, John Hutton, said:

“It is time for a radical rethink that can align the necessary project-management skills with the right performance incentives...This is precisely what the GOCO concept…can offer and why the British government would be well advised to pursue it.”

The former shadow Secretary of State, the right hon. Member for East Renfrewshire (Mr Murphy) said:

“There needs to be rigorous examination of all the possible options and a robust comparison between the two options of a GoCo model and DE&S+…we will support what we hope is a genuine competition.”—[Official Report, 10 June 2013; Vol. 564, c. 53-54.]

That is what we have conducted and the hon. Gentleman is standing at the Dispatch Box complaining about it.

The hon. Gentleman tells me that this is the statement I did not want to make. Well, he gets the prize—of course it is the statement I did not want to make. I hoped that we would find a wide field of GoCo competitors able to engage with the process of delivering a value for money proposition to the taxpayer, but let me tell him how it works. The Opposition can stand on the sidelines slinging mud and insults, but the Government have to deal with the situation as it exists in the real world. We have to take the situation as we find it and manage the risks. [Interruption.]

[Mr Speaker]

Order. The hon. Member for Plymouth, Moor View (Alison Seabeck) must calm down. She is shouting noisily and I can hear her above her hon. Friends, who are also misbehaving. They must calm themselves. Let us hear from the Secretary of State.

--- Later in debate ---

[Mr Hammond]

I will come to the hon. Lady in a minute.

We have to deal with the situation as it exists and we have to find solutions. What I have outlined today is the solution to the challenge facing DE&S in the real world.

The hon. Gentleman asked some specific questions. He asked me when the decision was taken. He says that we knew three weeks ago that we had received only one bid, and later asked me what the role of the Treasury had been. Since we received notification that we would not get a bid from the alternative consortium, we have been engaged in discussions with the Cabinet Office team, the Treasury team and my own senior officials to look not only at the risks inherent in trying to continue a contracting process with a single bidder, but how we can reinforce the DE&S plus proposition and the best way to go forward. I am sorry if he would have liked a decision more quickly, but I have to tell him that three weeks was the period it took to arrive at a robust conclusion on where we are and where we need to go. We have learned from the process. Talking to bidders and potential bidders has identified some of the challenges and issues we will be able to address to construct the DE&S plus process that I have set out today and, crucially, import private sector skills.

The hon. Gentleman mentioned Lord Levene’s report, but omitted to tell the House that the report gives the Department an excellent result overall for the delivery of the transformation process. He will know—I am sure he has studied this diligently—that Lord Levene explicitly had no remit to address DE&S plus, because it was being dealt with through a separate process driven from the Gray report. It is no secret, however, that Lord Levene, who once ran defence procurement, has always been a sceptic of the GoCo process. It is no secret that Lord Levene believes that only if DE&S plus has total freedom to hire, fire and remunerate on a fully private sector model can it succeed inside the public sector. As the hon. Gentleman and other Members with experience of Government will know, however, there are all sorts of public accountability reasons, relating to managing public money, why that is simply not possible to deliver in its purest form.

The hon. Gentleman asked me about GoCo as a potential future solution. All the evidence from this competition tells us that GoCo can deliver a value for money proposition for the taxpayer. To make it contractible, we will have to develop the DE&S proposition significantly so that it has a better and stronger baseline against which potential contractors can measure their return, and so the Department can be confident that we are not giving away public money in any contract we enter into. It remains a possibility for the MOD, once DE&S-plus is match fit, to consider running the GoCo competition again to test the proposition, in the interests of the armed forces and taxpayers, and to challenge the private sector to come forward with a proposal that will deliver value for money against the match-fit DE&S.

The hon. Gentleman asked me about part 1 of the Defence Reform Bill. Our intention is that it should continue as it stands. It will provide the legislative framework for testing the GoCo proposition, should a future Government wish to do so.

I anticipated that the hon. Gentleman would ask me, quite properly, about the costs involved in pursuing the GoCo competition. The calculation I have is that just under £7.4 million has been expended on the process.

The hon. Gentleman asked me what discussions had been held with Bechtel. He will appreciate that until the formal announcement was made to the House a few moments ago, what I could have said to, and discussed with, Bechtel was heavily constrained. In the interests of propriety, I have had no direct communication with Bechtel, but my officials have been in contact. The indication we have is that it is interested in being considered for the provision of support to the public sector DE&S plus entity through one of the support contracts that we will be letting. The invitation to negotiate that we issued for this competition made it clear that the Government could terminate the process at any point and that bidders would not be entitled to compensation or reimbursement of bid costs. The legal advice I have had is that if any such claim was received, we would be in a very strong position to resist it, and I would intend to do so.

Finally, the hon. Gentleman asked, quite properly, about the impact on staff at DE&S, not just in Abbey Wood —they are spread all across the world—but particularly in Abbey Wood. As I speak, Bernard Gray, the Chief of Defence Matériel, is, I understand, holding a town hall meeting for staff at Abbey Wood to explain to them the position and the plans for the future.

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

My right hon. Friend has just said that these changes would

“permit the recruitment into DE&S of key commercial and technical staff at market rates and with minimum bureaucracy”.

What exactly does that mean? Does it mean that the civil service terms and conditions of service have been abandoned, and only for DE&S?

[Mr Hammond]

It means that the Treasury and the Cabinet Office have agreed that we will have a bespoke regime for this central Government trading entity, recognising that it faces one of the most commercial sectors of the marketplace. We will be able to employ people with technical and high-level management skills at market-reflective salaries and to recruit them through an accelerated process that does not require us to go through the usual nine to 12-month process required to recruit senior civil servants.

[Mr Bob Ainsworth (Coventry North East) (Lab)]

The part of Bernard Gray’s report with which the previous Government, who commissioned it, had the most difficulty was that concerned with the GoCo company, because at that stage we could not see how it could be made to work. The process that the right hon. Gentleman has been through has shown the difficulties with moving to that kind of model, but rather than taking it off the table, he says it could be enacted at some time in the future. What kind of reaction does he expect to get to that from industry and DE&S staff themselves? The Chairman of the Defence Committee just raised the importance of getting the right skills into this area. With the uncertainty that the Secretary of State’s announcement today leaves hanging over the future of the organisation, will that be enhanced or made more difficult? What kind of a reaction does he expect from industry to this uncertainty?

[Mr Hammond]

I am grateful to the right hon. Gentleman for his question, because he knows something about this. I recognise his concern, but it is my judgment that the kind of people we are looking to attract into DE&S—people with high-level commercial skills—will not be afraid of the possibility of a future evolution into a GoCo.

We can do a great deal to deliver significant change within the public sector—we can bring in people with the right skills, we can upskill staff, we can install new systems, processes and controls, all of which we will now commit to doing, and we can apply external resource to programme management—but we will still essentially be talking about a system where private sector skills sets are employed to advise but civil servants make decisions. Those private sector participants will be paid flat fees; they will not be “at risk” in the structure. That does not fundamentally change the culture. It is an open question whether we can get far enough through that construct or whether, once we have made DE&S as lean and fit as it can be within the public sector, we will need to test again what additional value for the taxpayer could be generated by making the culture shift that having a risk-taking private sector strategic manager take over day-to-day running of the operation would deliver.

[Sir Gerald Howarth (Aldershot) (Con)]

I congratulate my right hon. Friend on having grasped this particularly difficult nettle. Does he agree that in addressing the skills issue so ably highlighted by Bernard Gray, these proposals raise the prospect of having an intelligent customer in the Ministry of Defence and therefore of avoiding some of the ghastly procurement mess-ups created by Labour? Would he be good enough to indicate how he sees ministerial accountability being applied to the new agency? Will it report direct to Parliament, as he mentioned, or will it report to Ministers, who would then report to the House?

[Mr Hammond]

There were two questions there. First, my hon. Friend is absolutely right to point out that for a customer-supplier interface to work, we need skills on both sides. This is not just about upskilling DE&S; simultaneously, we are also carrying out a project within the MOD that will continue to upskill the customer side to ensure that we can be an intelligent customer. On accountability, of course Ministers will be accountable to Parliament for DE&S’s activity, but as I have announced, the chief executive will be an accounting officer with a direct line of accountability, via the Public Accounts Committee, to Parliament.

[Angus Robertson (Moray) (SNP)]

The long-standing inability of the MOD properly to manage procurement continues with this debacle, but what concerns me is not just the project or financial management of procurement, but the delivery of often life-saving equipment to our service personnel. Does the Secretary of State agree, therefore, that whatever emerges from this shambles, we cannot allow a situation where the MOD recommends potentially life-saving equipment, such as anti-collision systems for Tornado jets, but then does not deliver it for 15 years?

[Mr Hammond]

This is probably not the time for a discussion about anti-collision systems, which I know is a subject the hon. Gentleman has raised recently and no doubt will want to raise again. Hon. Members must understand the distinction, however, between failures of the procurement process and the difficult prioritisation of spending decisions. The latter is the responsibility of Ministers and cannot be derogated or laid off on to any other organisation; Ministers have to make those difficult prioritisation decisions, and we then have to hope for an organisation that can execute them efficiently. Today, we are essentially talking about the execution part of the process.

[Sir Nick Harvey (North Devon) (LD)]

I commend the Defence Secretary for the practical decision he has announced today and congratulate him on the progress he has already made in tackling the long-running problems of defence acquisition, not least in empowering the front-line commands, reducing the number of changes to requirements and upskilling the MOD as a customer. The entity he has described is indeed DE&S plus operating as a practical rather than simply a theoretical option. It is essential that those dealing with industry can do so with the same sorts of terms and conditions as those that industry enjoys, and this is a way of giving them that opportunity. I ask him, however, not to abandon entirely the possibility of a GoCo in the long term and to put those measures on the statute book so that a future Government, of whatever colour, could decide to take the model further.

[Mr Hammond]

My hon. Friend is absolutely right. There is a long history of failure in defence procurement by Governments of both main parties going back decades. We now have to construct a model that works. As I just said to the right hon. Member for Coventry North East (Mr Ainsworth), the former Defence Secretary, we can do a lot within the public sector in DE&S plus, but we cannot make the culture change that some people think is necessary. It is right and proper that we do what we can in the public sector to make DE&S, as a public sector body, as high a bar as we can for a private sector challenger to have to match and exceed, but we should not be afraid, once we have done our internal reform work, to allow the private sector to make proposals again to see whether it could deliver yet more value for money for the taxpayer. That is, after all, our principal responsibility.

[John Woodcock (Barrow and Furness) (Lab/Co-op)]

There was surely no reason the Secretary of State had to wait until the GoCo option had collapsed before coming forward with these amended DE&S plus proposals. Does that not show that he was never truly neutral on the choice between an in-house option and a GoCo, that he wanted to rig the process in favour of a GoCo, and that that bias has blown up in his face, costing taxpayers and his own personal reputation?

[Mr Hammond]

I remind the hon. Gentleman that his Front-Bench spokesman welcomed the competition and said that we needed to test the GoCo proposition against the DE&S plus proposition—

[Mr Kevan Jones (North Durham) (Lab)]

Read Hansard.

[Mr Hammond]

I have the Hansard quote in front of me. The former shadow Secretary of State welcomed the competition and said that we needed to test the two propositions against each other, which is what we have done. The hon. Member for Barrow and Furness (John Woodcock) makes an assertion that I can tell him is wrong. I have always recognised that there are significant risks to the GoCo proposition and significant potential benefits from it. The challenge is to weigh the risks and the benefits and we would not be able to do that until we received the bids, which is why we had to run a competition.

We have seen the proposal that has been worked up by the DE&S plus team only in the last three weeks. It has worked behind a Chinese wall and has made clear that it believes that there will have to be an injection of external private sector skills in the form of an external business partner, in addition to the freedoms and flexibilities that it seeks within the organisation. That is the model that we are now going to put in place.

[Peter Luff (Mid Worcestershire) (Con)]

Although I accept that the Secretary of State had little choice but to make the announcement that he has made today to the House, I am sure that he will share my deep sense of regret that we cannot move more rapidly to the greater savings and performance improvements that a GoCo would have delivered. Can he reassure me a little about the private sector’s role in this new organisation? Can he unpack for me a little how the private sector will operate within the GoCo model and the DE&S plus model, and particularly reassure me that this is not just a recipe for more contractors?

[Mr Hammond]

I am grateful to my hon. Friend—someone who, again, knows something about this from his long service in the Department. The key distinction is between a model that puts the private sector in day-to-day leadership of the organisation—working on an incentivised fee that places it at risk—and a model where the private sector provides specific skill sets to civil service decision makers. That is the distinction. What we envisage in the DE&S plus model is probably three separate contracts; one to provide us with programme management support, a spine for the organisation; one to provide us with HR support, an area of particular weakness in DE&S; and a task-and-finish project to install some additional financial control systems within the organisation.

[John McDonnell (Hayes and Harlington) (Lab)]

I said on Third Reading of the Defence Reform Bill that having one bidder stretched the concept of competition to absurdity, so I welcome today’s decision. However, there are 16,000 workers whose futures are still vulnerable following the Secretary of State’s statement. May I suggest that it is not just about bringing in expertise; it is about retaining expertise and skills as well? I would welcome the Secretary of State personally meeting the unions to assure them that, under his new proposals, there will be no detriment to their conditions of service.

[Mr Hammond]

I have personally met the unions and I am aware of their concerns. I have also explained to them the opportunities that this model will create for employees in DE&S. The core DE&S—that is to say the part of the organisation that is responsible for procurement —has about 9,500 people. The hon. Gentleman is absolutely right to say that one of the big challenges at the moment is retaining the highly skilled people. We are losing people to the private sector; worse, we are losing people to other parts of the public sector that have greater freedom to hire. That is why we must address this issue in the way I have outlined today.

[Bob Stewart (Beckenham) (Con)]

In 1984 I was a young major in the Ministry of Defence, and Michael Heseltine, as Secretary of State, definitively told us that he had sorted out defence procurement. It is clearly a basket case and very difficult. How will my right hon. Friend compensate majors and lieutenant-colonels who are doing equivalent jobs to those being done by people from outside the Army but are not getting the same sort of salaries? How will we balance that?

[Mr Hammond]

The military component in DE&S is vital. It is a relatively small number—about 1,500 military personnel. They will of course continue to rotate as part of a career development plan on normal military terms and conditions. For the kind of flexibility that I have talked about today, we will need to hire in specialist skills from the commercial sector and that will not alter or affect in any way the very important role that the military will continue to play.

[John Robertson (Glasgow North West) (Lab)]

The Secretary of State talked about mud-slinging from Opposition parties. I am sure that he slung some mud in years gone by when we were in government. I deal with real people and the great worry about procurement—as always, particularly on the Clyde and in shipbuilding—is that statements that have been made recently will now be shelved until we sort out the process. Can he assure me and the 2,000 people who work in the Scotstoun yard that after everything that has been said up to this point—barring the wrong result next year in the Scottish referendum—the Clyde is still secure?

[Mr Hammond]

The statement that I have made today has no impact on the announcement I made a few weeks ago about the rationalisation of the shipbuilding industry and BAE Systems’ decision to concentrate complex warship building on the Clyde.

[Mr Bernard Jenkin (Harwich and North Essex) (Con)]

I commend my right hon. Friend’s statement, not least because it is the statement that the Public Administration Committee wanted him to make, having expressed in our report on procurement some scepticism that the GoCo would work. Is not the DE&S plus plus proposal still something of a contortion to get round stupid, outdated and silly restrictions on the ability to retain senior civil servants in role as senior responsible owners over the lifetime of projects and on the ability to bring in new people with the right commercial skills? Why are we having to go through this exercise when we should be reforming the civil service so that this kind of flexibility is available to all Government Departments and all procurement projects?

[Mr Hammond]

I understand my hon. Friend’s position, which is long held and loudly expressed, but DE&S is, if not unique, a very unusual organisation within the civil service. It is almost wholly commercial in what it does. Most of its interaction is with the commercial sector and it is competing directly for skills with the private sector marketplace. It is not like a policy making department. It is absurd that we are constrained to deal with civil servants whose job is commercial in nature in the same way as we deal with policy making civil servants in a central Whitehall policy Department. The freedoms and flexibilities that the Treasury and the Cabinet Office have agreed for DE&S plus will free us from that constraint, which will make DE&S plus a much more credible and commercially focused proposition. However, as I have said, I would not like to rule out the possibility of challenging it in the future with a GoCo competition to keep it on its toes. Let us try everything and make sure we get the best value for money for the taxpayer.

[Mark Hendrick (Preston) (Lab/Co-op)]

How will the further involvement of the private sector and the introduction of the GoCo model square with the national interest of having a proper defence industrial strategy for the UK, or do the Government no longer believe in a defence industrial strategy?

[Mr Hammond]

We have a defence industrial strategy. The question from the hon. Member for Glasgow North West (John Robertson) about the Clyde yards will remind the House that, just recently, we made a very important step forward in allowing BAE Systems to explain to the world how it is going to manage complex warship building in the future to ensure that we retain a credible and viable complex warship building operation in the UK.

[Mr Julian Brazier (Canterbury) (Con)]

My right hon. Friend has won some important concessions from the Treasury, and not just on terms and conditions of service for these key people, but in other areas, such as partly restoring the ability for annual financial carry-over, which was lost under the previous Government. Does he think he would have been able to win those concessions had he not been floating a more radical alternative?

[Mr Hammond]

My hon. Friend raises a fascinating proposition: was this all some complex ruse to try to squeeze greater concessions out of the Treasury? I can assure him that that was not the intention. We genuinely wanted, and want, to explore the possibilities of using the private sector in a strategic role and, through DE&S plus, in a more traditional supportive role to get the best value-for-money proposition for the taxpayer—nothing more and nothing less.

[Nick Smith (Blaenau Gwent) (Lab)]

The Secretary of State has talked about the MOD becoming a better, intelligent customer, which is a good thing, but how will he get senior officers to adopt the different mindset and skills needed to do that?

[Mr Hammond]

There are two parts to that question. We have made substantial progress on the mindset by devolving budgets to the front-line commands, which now control their own budgets and have significant autonomy in prioritising their requirements. Front-line commands are therefore managing their own requirements, rather than having somebody else tell them what their priorities are. That has had a significant impact on the culture among the senior military cadre. As for skills, we recognise that there is an upskilling requirement, which is a key element of the intelligent customer project that we are currently running in the Ministry of Defence, which includes bringing in civilian specialist skills to support the military command budget holders in acting as customers.

[Dr Julian Lewis (New Forest East) (Con)]

This is a sensible decision, but one of the perennial problems with defence procurement under successive Governments has always been the way in which specifications for what is to be procured are changed by Ministers and especially by the military along the journey. Will the new model be any more capable of coping with that perennial problem than any of the previous iterations?

[Mr Hammond]

Yes. I hope we have already made good progress on this issue by introducing a much more disciplined boundary between DE&S and the customers, but the intention of setting up the body as a central Government trading entity is that there will be a hard boundary between it and its customers. We will be able to move—much more quickly, in fact, than we would with a GoCo—to a hard-charging regime, where the customer pays for the cost of the changes he is imposing. In my judgment, when front-line commands hold their own budgets and have to pay the cost of making a change, there is nothing more likely to cause them to think twice about making such changes.

[Toby Perkins (Chesterfield) (Lab)]

If I may return to the question that my hon. Friend the Member for Barrow and Furness (John Woodcock) asked a moment ago, it is now 22 months since the Government White Paper on defence procurement. Why is DE&S plus being considered as a serious option only now? Is it not because it was put on the back burner, as all the Government’s attention was focused on the GoCo?

[Mr Hammond]

No; the first phase of the overall project was about designing what we required in DE&S and looking at how the interface would work with the devolved customer—the devolution of budgets to the front-line commands is also a new step that we have introduced. We have also resourced the work on developing the DE&S plus model since we launched the MatStrat—matériel strategy—competition earlier this year, so that work has had proper resourcing. Although the proposal that has been put forward is nowhere near as detailed as that put forward by the private sector bidder for the GoCo proposition—as it is only right to expect—it is a sound framework for building a public sector solution to the challenge we face in DE&S.

[Mr Philip Hollobone (Kettering) (Con)]

Having visited Abbey Wood with the armed forces parliamentary scheme, may I congratulate my right hon. Friend on being bold and innovative in trying to reform the massive defence procurement system? Can he give the House his best examples under the current system of something that has been procured well and something that has been procured badly, and the lessons learnt from both?

[Mr Hammond]

There are countless examples of excellent procurement results in the UOR—urgent operational requirement—system. Indeed, it is common ground among Members who take an interest in this issue that we have to try to import some of the lessons from the UOR system into the routine procurement system. I do not want to pre-empt the major projects review that the National Audit Office will publish in the new year, but I can promise my hon. Friend that he will see programmes that deliver on time and within budget on a scale that he will not have seen before. That is a sign of the progress that is being made, although there is much further to go.

[Gavin Shuker (Luton South) (Lab/Co-op)]

Part of getting value for money for the taxpayer out of the defence industry must surely be about sending clear, consistent signals to that industry. Does the Secretary of State believe that this affair has met that test?

[Mr Hammond]

Yes, and if the hon. Gentleman talks to the defence industry, he will find that it is getting a clear and consistent signal. Let me be clear: this is—[Interruption.] I beg to disagree with the hon. Member for North Durham (Mr Jones): that is what the industry is saying. This is not about beating people up over their profit margins; it is about working together to try to ensure that we do projects in a way that can deliver value for money. It is about not letting contracts where the costs of any overruns are split 90% to the taxpayer and 10% to the industry. No wonder the industry is having a quiet word with the hon. Gentleman.

[Jack Lopresti (Filton and Bradley Stoke) (Con)]

Will the Secretary of State give the House an assurance that, although difficult decisions will be made, with potentially a detrimental effect on some staff at DE&S, these decisions will be made intelligently and with great sensitivity? Given what has been, to say the least, quite a long period of uncertainty, can he give an assurance about when staff at DE&S will receive some much needed clarity on how the plans will affect them individually?

[Mr Hammond]

We are 800 posts gapped in DE&S at the moment, so this is not some project to reduce the number of staff. The objective is to increase the number of staff by filling some of the gapped posts, but as the process takes place—this will not happen immediately—there will need to be a more robust approach to upskilling staff and monitoring their performance, to ensure we have the right people in the right jobs and with the right support to deliver the outcome we need. However, there is no transfer going on and no TUPE involved. I can give my hon. Friend an assurance that those concerned will remain in the public sector and remain covered by the public sector protections that they already enjoy today.

[Guy Opperman (Hexham) (Con)]

Everyone agrees that defence acquisition has troubled many Governments for many years. I welcome the Secretary of State’s statement today, but would he be so kind as to write to me in the near future about whether the decision will make any changes to the provision of equipment facilities or to the jobs of my constituents who work in Albemarle barracks, MOD Longtown or RAF Spadeadam?

[Mr Hammond]

I am happy to write to my hon. Friend, but as I have just said, there will be no changes as a direct consequence of today’s announcement in the numbers employed or the place of employment. However, obviously I cannot give him an absolute assurance that over time the organisation will not evolve, as it becomes leaner and more efficient.

[Jeremy Lefroy (Stafford) (Con)]

I welcome my right hon. Friend’s statement. He referred to more than £4 billion of centrally held contingency for defence procurement to address risks as they crystallise. Can he update the House on whether that has had to be drawn on so far and, if it is in future, whether it will be replenished?

[Mr Hammond]

The answer is no: the £4 billion—it is actually slightly over £4 billion—remains intact. As I told the House when I made the aircraft carrier statement, we originally provided a larger sum of contingency. We allocated part of that specifically to the anticipated cost increase in the aircraft carrier—that was fully provided at the time of the May 2012 statement—but we have not had to make any further call on that contingency. We will wait and see what the major projects review report says, but as I see it at the moment, I do not anticipate any call on that contingency in the foreseeable future.

[Mr Peter Bone (Wellingborough) (Con)]

I am sure the whole House would like to thank the excellent Secretary of State for making an oral statement. It is very difficult for Ministers to come and make statements that they do not want to make, and I am sure the House will welcome the right hon. Gentleman’s coming here and allowing us to put questions to him. The only issue I think the House has to deal with today is whether the announcement will improve defence procurement. If that is the case, it should be welcomed. Is it going to improve it?

[Mr Hammond]

I am happy to confirm to my hon. Friend that I am confident that the announcement will improve defence procurement and that it will set us on a path of evolution for the future, enabling us to keep our options open and allowing us to explore and continually challenge the organisation to deliver better things for our armed forces at better value for the taxpayer.

[David Mowat (Warrington South) (Con)]

The Secretary of State said that the DE&S plus bid was somewhat less detailed than the Bechtel bid, which presumably means that if they were both evaluated on a level playing field, the Bechtel bid would be likely to win. Will my right hon. Friend tell us whether the major learning points or good points in the Bechtel bid will be incorporated into what is now going forward with DE&S plus?

[Mr Hammond]

My hon. Friend asks a very good question. The material contained in the Bechtel bid is “commercial in confidence”, and Bechtel will have spent a considerable amount of money generating the bid, and would naturally not expect the Department to abuse that confidence. I can tell my hon. Friend that the broader process, the work we have done on DE&S plus and the preliminary discussions we have had with bidders and potential bidders have pointed the way to the future development of DE&S in a way that I think has been most helpful, and will inform the process going forward.