Better Defence Acquisition

Jim Murphy Excerpts

Monday 10th June 2013 Commons Chamber

[Mr Jim Murphy (East Renfrewshire) (Lab)]

I start by thanking the Secretary of State for his statement and for advance sight of it. Reform of defence procurement is one of the major challenges facing UK defence. Those on both sides of the House will want to see reforms that deal with overspends and overruns, and ensure that world-class equipment is delivered when and where our forces need it. For too long, the good intentions of successive Administrations have not delivered sufficient reform in defence procurement. However, just as some of the responsibility can be shared, our resolve to learn the right lessons and deliver far-reaching reform must also be collective. We therefore welcome much of today’s statement.

Future procurement systems must provide value for money within financial constraints. Better performance will come from greater professional project management, faster decision making, fuller accountability for outcomes and a more considered use of military expertise. Labour supports reforms—the Bernard Gray report, on which today’s White Paper is based, was commissioned by the previous Government. We have proposed a new budgetary discipline, whereby deferred decisions that increase cost are accounted for within a rolling 10-year cycle, and increased certainty for industry over sovereign and off-the-shelf capabilities.

Labour Members are open-minded about how that is achieved, but I wish to be clear that welcoming this process today is not the same thing as supporting a GoCo in principle. 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+. That comparison should rest on the principles of ensuring value for money within programmes; industry adhering to new targets on time and cost; maintaining parliamentary accountability; enhancing a culture of consequence for decision makers; and military involvement being based on tri-service working, not on single-service rivalry. So reform must extend across the Ministry of Defence. Too often, scope creep has led to systems exceeding identified need, and major decisions have been pushed to the right to save in the short term at the expense of longer-term budgetary bow wave. Today’s challenge for Ministers is not just to determine a management model, but to demonstrate that decades-long entrenched behaviours are being corrected.

Let me deal with the specifics of today’s announcement. On the assessment phase, will the Secretary of State pledge to publish the findings of the two value-for-money studies and allow for a consideration by this House prior to a final decision being taken in the legislation? It is essential that Parliament, industry and our armed forces have full confidence that strategic affordability is the determining factor in this process. On costs, will the Secretary of State say whether the new management team of either model would re-cost the baseline of the core equipment programme, or would the figures published earlier this year remain? Furthermore, in the light of the National Audit Office’s observation that the MOD’s assessment of risk is “not statistically viable”, would the new management be able to reform the current method of risk assessment? On staffing, the MOD has said that current reductions will not affect outputs. Would either management model be able to make decisions over staffing independently from the Secretary of State? Will he confirm that trade unions will be consulted throughout the assessment phase?

It is essential to maximise military expertise, so will the Secretary of State say whether he considers it preferable to change the current ratio of military to civilian numbers in procurement within the MOD? Specifically on the GoCo, will he pledge that senior officials currently working on this process within the MOD will not be able to work for the GoCo consortium without a prolonged period of purdah? Many in the country will have a concern about the extent of a private entity’s potential reach over public policy. So, under these plans would a GoCo model cover the whole equipment programme, including the nuclear deterrent? What is the time scale for the implementation of a GoCo? That will enable us to judge when efficiencies may begin to accrue.

One of the biggest uncertainties around GoCo has to do with the ownership of risk and whether contractors could generate private profit while financial risk remained in public hands. For example, can the Secretary of State say whether liability for the £468 million cost overrun noted in the National Audit Office’s “Major Projects Report 2012” would have rested with the taxpayer or the GoCo, had it been established?

On the single source regulations office, we welcome the proposal in principle and will examine it closely. It is essential to drive down cost where possible in single sourcing, as the Secretary of State said. Will he say a little more about who would appoint the members, and whether regulations would be subject to the one-in, one-out rule?

In conclusion, we will support what we hope is a genuine competition. We will scrutinise the processes carefully, because efficient and effective defence procurement is essential, not just for the Ministry of Defence bottom line, but for the remarkable men and women of our armed forces, whom we place in harm’s way to serve on the front line.

[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.