Defence: Better Defence Acquisition

Lord Astor of Hever Excerpts

Monday 10th June 2013 Lords Chamber

[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever)]

My Lords, I am sure the whole House will wish to join me in paying tribute to Lance Corporal Jamie Webb of 1st Battalion The Mercian Regiment, who died in hospital in Kandahar on Tuesday 26 March from wounds received in Afghanistan on Monday 25 March this year; Corporal William Savage and Fusilier Samuel Flint from the Royal Highland Fusiliers, 2nd Battalion The Royal Regiment of Scotland; and Private Robert Hetherington, a Territorial Army soldier from 51st Highland, 7th Battalion The Royal Regiment of Scotland—7 SCOTS—who were killed in Afghanistan on Tuesday 30 April this year; also, Drummer Lee Rigby of 2nd Battalion The Royal Regiment of Fusiliers, who was killed in Woolwich, south-east London, on 22 May this year. My thoughts are also with the wounded and I pay tribute to the courage and fortitude with which they face their rehabilitation.

I turn to the Statement, which is as follows.

“Mr Speaker, the defence of UK national interests is a priority for this Government. To secure that defence we must provide our Armed Forces with the equipment and capabilities they need to operate in a rapidly changing security environment. Without the right equipment, delivered on time, properly maintained and available for use, our Armed Forces cannot function effectively and our national interests are put at risk. Effective procurement and support of defence equipment is therefore not just desirable, but an essential part of maintaining flexible and effective Armed Forces.

For decades, there has been an acknowledgement that defence acquisition in this country can, and should, be done better. Despite numerous reviews and reorganisations, successive Governments have failed to embed the systemic changes necessary to achieve that objective. We owe it to the men and women of our Armed Forces, and to the long-suffering taxpayer, to do better.

Two separate independent studies carried out for the MoD have suggested that the costs arising from inefficiency in the procurement process are between £1.3 billion and £2.2 billion per annum. Waste on that scale is unacceptable at any time—more so at a time of acute pressure on the public finances. I am determined to drive a step change in the way we do our defence procurement business.

In April, I announced to the House that we had launched the assessment phase for the department’s materiel strategy programme, considering two options for the future of the Defence Equipment and Support organisation. The first is a public sector benchmark, which we call DE&S-plus, and the second is a Government-owned, contractor-operated entity, a GOCO.

Today, I am publishing a White Paper which sets out the materiel strategy proposals in more detail and provides more information about our intention to create a new statutory framework to drive better value in single-source procurement contracts, protecting the taxpayer in this significant area of MoD business.

We believe that a GOCO operating model is the solution which is most likely effectively to embed and sustain the significant change that is required to reform defence acquisition. But the decision will be based on an objective value-for-money comparison between the GOCO and DE&S-plus options. The assessment phase is designed to deliver specific, costed, contract-quality proposals from GOCO bidders and test them against the DE&S-plus benchmark.

There has been considerable speculation in the media and elsewhere about the scope of a GOCO. At the most extreme, I have seen it suggested that the proposal is simply to hand over £15 billion a year of taxpayers’ money to a private company and leave it to decide what kit to buy for our Armed Forces. Let me reassure the House that that is emphatically not the proposition.

If GOCO is the selected option, the GOCO partner will manage DE&S on behalf of the Secretary of State. It will act as his agent. All contracts will continue to be entered into in the name of the Secretary of State. Strategic direction will be provided by a governance function that will remain within the MoD. The GOCO’s customers will be the front-line commands and the MoD itself. The DE&S workforce will be transferred to the GOCO operating company under standard TUPE—transfer of undertaking, protection of employment—arrangements and we will expect the GOCO partner to inject a small number of senior managers and possibly some key technical staff. Crucially, the GOCO is assumed to be able to recruit and reward its staff at market rates—a critical freedom in a business which is required to deal with the private commercial sector on a daily basis.

The proposal set out in the White Paper is for a phased transfer of DE&S to a GOCO, with checks and break points to allow us to halt the process if it is not delivering the results we require. The legislation and the contract will include a transfer regime that will allow the Secretary of State to transfer the business to another contractor, or back to the MoD in extremis.

If, at the end of the assessment phase, a GOCO operating model is selected, then we need to be able to move quickly to conclude a contract with the successful bidder. The Government therefore intend to provide in the defence reform Bill the necessary authorities to let a GOCO contract in 2014, together with measures required to allow a GOCO, to operate effectively.

There are finely balanced arguments about whether primary legislation is strictly required to allow the establishment of a GOCO. The Government have, however, decided that it is right that we should legislate in this instance because of the importance of DE&S to our Armed Forces and in order to ensure that Members of both Houses, many of whom take a keen interest in defence matters, have a proper opportunity to explore and debate the issues.

The White Paper sets out the proposed model for a GOCO, its key features and our expectations with regard to the control that the department will continue to exercise and the freedoms that the GOCO will enjoy. Its purpose is to set in context the legislation that we are bringing forward in the defence reform Bill, including provisions to: ensure that the MoD Police have the appropriate jurisdiction to be able to operate within the GOCO environment; extend to the new body certain statutory immunities and exemptions enjoyed by the Crown, for example, in relation to the Health and Safety at Work etc. Act and the Nuclear Installations Act; and allow the transfer of shares in the operating company and/or property rights and liabilities in the operating company or contracting entity at the direction of the Secretary of State

I turn to the single-source procurement reform. The White Paper also sets out reforms to how the MoD undertakes single-source procurement of defence equipment. Open competition is our preferred approach to getting value for money. But sometimes there is only a single provider of a capability that we require. The need to maintain critical national industrial capabilities or sovereign control of the intellectual property in equipment programmes sometimes requires us to place contracts with UK companies without a competitive process.

Single-source procurement accounts for about 45% of the total MoD spend on defence equipment and support, or around £6 billion per year, and it is likely to remain at those levels for the next decade or so. Without competition, suppliers can price, and perform, without being constrained by the disciplines of the marketplace. There is a clear risk to defence and to taxpayers, and ensuring that we get good value for money in single-source procurement is a key part of my programme to reform defence acquisition.

The MoD currently uses a framework for single-source procurement which has remained largely unchanged for the past 45 years, despite the far-reaching changes to the industrial landscape and to commercial procurement practices that have occurred in that time. Under this system, the profit that contractors can earn is fixed, but there are few incentives for them to reduce costs. Such a system does not serve the best interest of defence or of a competitive, export-focused defence industry.

In 2011, the MoD commissioned the noble Lord, Lord Currie of Marylebone, to undertake an independent review of our existing approach and to make recommendations. He recommended a new framework: one that is based on transparency of contractor cost data, with much stronger supplier efficiency incentives, underpinned by stronger governance arrangements. Based on his recommendations, and extensive consultations with our major single-source suppliers, we have developed the new framework that I am proposing, details of which are set out in the White Paper.

At its heart is the principle that industry gets a fair profit in exchange for providing the MoD with the transparency and protections that we need to assure value for money. A statutory basis will ensure widespread coverage across our single-source suppliers and application of the regime throughout the single-source supply chain. The system will be policed by a stronger, independent, single-source regulations office to monitor adherence and to ensure that the regime is kept up to date. These changes will incentivise efficiency in operating costs and minimisation of overheads, supporting UK defence sector competitiveness, both at home and in export markets.

The proposals set out in this White Paper will deliver the real reform that our acquisition system needs to provide the support that our front-line forces deserve, to maximise the benefit of our £160 billion, 10-year defence equipment programme, and to deliver value for money for taxpayer. I commend the Statement to the House”.

--- Later in debate ---

[Lord Astor of Hever]

My Lords, I thank the noble Lord for the general support given by Her Majesty’s Opposition for our defence procurement reform. We also want to approach this in a non-partisan way. There is general acceptance, including by the Opposition, of the problems in defence acquisition. Where we differ is perhaps in how we solve those problems. We have proposed a GOCO solution because we believe that incentivisation, the hard contract and the freedoms that GOCO would offer are the right way to deliver sustained improvement. Allowing the private sector, too, not only to share its expertise but to be held accountable for delivery will, we believe, deliver far greater effect than a wholly public sector set-up. We are testing that right now. This is very much the assessment phase—a decision will be made next year—and we are in listening and learning mode. There are a lot of experts in this House who know a great deal about this subject. We are very keen to hear any suggestions they may have and we are open to all their views.

The noble Lord asked me a number of questions. I was not able to write quickly enough to be able to answer them all but I will write to him and make sure that copies are also sent to noble Lords who ask questions afterwards. The first question was about the Atomic Weapons Establishment, which is a GOCO organisation, established to deliver a nuclear weapons capability for the UK nuclear deterrent programme. AWE Management Ltd is currently performing at or under its targeted cost and budget and has successfully shifted the organisation’s culture towards a more commercially focused one. Since transformation, AWE has successfully delivered efficiencies while increasing its salaries, and has allowed access to the necessary calibre of talent from the nuclear markets. We recognise that the AWE model may not entirely map to DE&S needs but it is a useful model against which to test our thinking.

The noble Lord asked me a number of questions about the workforce. The aim is to create an environment which supports more effective working at all levels across and between the interfaces of the new DE&S organisation and the wider department where our staff are more empowered and better able to carry out their jobs. This would allow DE&S better to support the Armed Forces and deliver better value for money for the taxpayer in a much more rewarding place to work. There would be more significant management freedom to run the organisation, increased opportunity to grow talent, develop the skills and the culture, and have the freedom and flexibility of management practices. The noble Lord asked about the role of military staff within the organisation. As is the case today, specialist military skills or expertise would be required in addition to recent operational experience to influence capability decision-making, delivery into service and support, and military staff would be seconded to the new organisation.

The noble Lord asked about the trade union position. We have been engaging with trade unions on our proposals throughout. Clearly, there are many questions that our workforce will wish to have answered as we develop both options through the assessment phase. But we would expect our workforce, and therefore the trade unions, to support our attempts to improve the environment in which our staff work, including the opportunity to improve skills, tools and processes. I have a lot of other information relating to the workforce on which I can perhaps write to the noble Lord. He asked how quickly we were planning to move. Taking the 2009 Gray report as a basis for change, we tested the thesis that the change we seek and the problems we are trying to solve could be made only by committing to a fundamental shift in approach. That detailed analysis led us to the two options: the GOCO model and DE&S plus. We have thoroughly analysed the business and the possible solutions and looked at the scope and capabilities of the organisation and what it is that we want. Now we need to assess who is out there who could actually deliver the proposition. That means running a competition which takes time, but we expect to make a decision next summer. I make no apology that it has taken some time. This is important, and it is important that we get it right.

The noble Lord said that we must be careful that we do not enter into a monopoly. I quite agree with him. We are in an assessment phase and a decision will be made next year. He asked about risks. Risks will be managed through the commercial contract. The MoD is taking forward plans to develop a customer construct that will be able to provide robust contract management. As with any major change programme, there are risks to its successful delivery. We will manage and mitigate these as the noble Lord would expect. The contract will be constructed with a number of break points, allowing the department to recompete the contract, or if necessary bring DE&S back in-house. A robust contract will be put in place between the GOCO provider and the MoD. The MoD governor function will monitor performance against the contract, and key performance indicators will be defined in the GOCO contract, covering the full spectrum of delivery, procurement, support, logistics and other services. Audits will be conducted as necessary to provide assurance that defence needs are being met.

I have done my best to answer as many of the noble Lord questions as possible but, as I said earlier, I will write to him on all the other ones.

[Lord Palmer of Childs Hill]

My Lords, we on these Benches associate ourselves with the condolences and tributes from the Minister. I will be more direct and ask just one question, and it may be easier to give just one answer. I am worried about the GOCO proposals, as are many people, but I believe that the situation appertaining to procurement in the MoD cannot continue as it is and that something must change. GOCO seems to be the preferred solution and gives us many worries that were expounded during the debate on the Queen’s Speech. If GOCO proceeds, the question I want to focus on is the identity of the contractor—the CO part of GOCO. From Written Answers received from my noble friend the Minister, there is no reason why this contractor may not be a foreign company. We are apparently reassured that the foreign company’s UK arm will have a Chinese wall between it and its US or European parent company. With the experience in this country of industries such as water being sold to foreign companies and how they then control those companies, is the Minister not being over-optimistic in thinking that, if there were secrets in the UK arm of these overseas companies, those secrets would not somehow go—this sounds like the last question—to those overseas companies?

[Lord Astor of Hever]

My Lords, my noble friend and I have had a number of discussions about GOCO and I am well aware of his concerns. I look forward to continuing discussions in the future and to hearing any positive suggestions that he has. I agree that something has to change. We cannot carry on with the existing situation.

The noble Lord asked me about national security protection, a point also made by the noble Lord, Lord Rosser, which I should have answered. Our national security interests are a primary responsibility of the Government. The better delivery of our acquisition support needs will be of real benefit. We will ensure that DE&S will be suitably constructed to ensure the protection of UK national interests. In order to safeguard UK national security, the contracting entity and the operating company must be UK registered and the overwhelming majority of the contract shall be performed in the United Kingdom. In addition, there will be restrictions on passing information to parent companies. Potential contracting entities will need to satisfy the Ministry of Defence that they can meet the national security restrictions, which will include a number of areas where only UK nationals can have access to the information.

I hope that reassures my noble friend. I have several other pages of information on this issue. I do not want to labour the House with it but I am quite happy to discuss it with my noble friend in private.

[Lord Reid of Cardowan]

My Lords, I join in the tributes paid and the condolences offered to the servicemen and servicewomen who have made the ultimate sacrifice for this country.

I welcome the publication of the White Paper, not least because it addresses in an open and discussive fashion a problem which, let us be honest, has bedevilled Government after Government of both political persuasions, although I suppose we must say now “all” political persuasions. I have one specific question only. It is not about the structure of the GOCO proposals, on which I am open minded, but about the underlying analysis. In doing so, I declare my interests, as registered, in the parliamentary, private and academic spheres.

The question is this: to what extent was the Government’s motivation based on the recognition that one of the key problems in procurement, giving rise to over-costs and over-runs in time, is the rapidity of cyclical innovation in cyber-related equipment? Put simply, 50 years ago, when we were dealing with the purchase of a platform, whether an armoured vehicle, an aeroplane or a battleship, the cycle of innovation of transformative and new products was 10, 15, 20 or 30 years. Now we are more concerned with what is on those platforms, not only the kinetics but the communication and the real-time analysis of situational awareness, and the cycle of innovation in that cyber-related procurement is something like 14 months. In other words, there is a cycle which occurs three times during the period of the normal procurement process. That on its own will not be solved by structural, managerial or contractual reformation. It would be interesting to know to what extent that was considered in the background thinking to the Government’s proposals.

[Lord Astor of Hever]

My Lords, I cannot answer that question relating to cyber, although I am sure that it was a contributory factor.

We have set out clearly in the White Paper the reasons for how we got here. The noble Lord and his colleagues who have had responsibility for procurement in the past are well aware of the problems. He makes a good point about cyber and the complexities and cost of it now. It is very relevant to the subject.

[Baroness Garden of Frognal]

My Lords, I encourage noble Lords to keep their questions brief. We have only 20 minutes and quite a few people want to speak.

[Lord Hamilton of Epsom]

My Lords, I very much welcome my noble friend’s Statement. GOCO will certainly introduce commercial disciplines and the incentives that can be provided by the private sector.

I have two questions for him. How long does he think these contracts will run for? How many years are we talking about? Will a GOCO address the question of the affordability of major projects? As we know, in the past we have seen enormous amounts of equipment ordered, particularly by the previous Government, although clearly there was not any money to pay for it. Will this introduction of a GOCO improve that situation in the future?

[Lord Astor of Hever]

My Lords, the answer to my noble friend’s first question is nine years. The answer to his second question is yes. We are determined. We feel that the discipline that will be brought in by a GOCO will make everything much more affordable and we will not have the kind of fantasy world that defence procurement has had in the past.

[Lord Hutton]

My Lords, like my noble friend, I warmly welcome the thinking behind the White Paper that has been published today and the way in which the Minister introduced it. We want to reach a bipartisan approach because these are problems that all Governments have shared and wrestled with.

I do not believe, however, that all the problems can be laid at the door of DE&S. A great deal of the sad and sorry history of defence procurement is as much to do with decision-making in the MoD as it is with the execution of those decisions. I am pleased that Ministers have now addressed the MoD decision-making part of this problem and it is appropriate that we now look at the DE&S part. I welcome what the Government have announced today.

I have two specific questions for the Minister and I should be grateful if he could respond to them. First, what proportion of the defence budget is it envisaged will initially be given either to a GOCO or to the reformed DE&S organisation? Are the Government planning a big bang, with all of the defence budget going in one go, or are they planning to release chunks of it at a time? Secondly, will the Minister specifically address the point about the United States Government? There have been reports in the press recently that the US Government have entered their objections to the process, particularly in regard to establishing a GOCO. Can he confirm whether any such representations have been made to Her Majesty’s Government by the US Government?

[Lord Astor of Hever]

My Lords, I thank the noble Lord for his support. I have read his excellent, well thought-through letter to the Economist. I share the noble Lord’s desire that this important subject should be above politics. The Secretary of State and my honourable friend the Procurement Minister are keen to brief Peers, individually or as a group, and to hear any suggestions, ideas or criticisms that anyone has. We want to get this right and, as the noble Lord said, it is above politics.

We have not yet decided the proportion of the defence budget but I will get back to the noble Lord when we have. As to the question about the United States, I have seen correspondence with our counterparts in Washington. There is a small amount of concern but they are approaching this issue in a positive way. They think that they could learn a lot from us. We will be the first country to do this. The noble Lord will be well aware of what happened down at Aldermaston. The United States feels that it has a lot to learn and has approached relations with us constructively. Again, I am quite happy to discuss outside the Chamber what the Americans have raised. On the whole, they have been very positive.

[Lord Lee of Trafford]

My Lords, I thank my noble friend for repeating the Statement and thank him and his officials for replying to some of the detailed questions that I raised in the Queen’s Speech debate. I had two specific questions for my noble friend. I asked what restrictions would be placed on the GOCO’s freedom to operate, specifically between buying off the shelf and sustaining our national strategic capabilities. The reply that I received is:

“As now, MOD and HMT will continue to approve procurement business cases. As part of this, MOD will assess and agree the proposed procurement strategy, which will enable the department to take issues such as these into account”.

If the MoD and HMT are going to second-guess what the GOCO is doing all the time, it is difficult to discern what freedoms the GOCO will actually have. Indeed, that is the very fundamental point of the GOCO.

Secondly, I asked what cognisance the GOCO would take of regional employment issues and the need to encourage SMEs, rather than support our major national contractors. The reply was:

“We have no reason to believe a GOCO would need to move the new organisation to different sites so it is unlikely to have any major impact on regional employment”.

With respect, I must say that that was not my question. I was not suggesting that the sites of the GOCO organisation or operation would have to be moved. I was asking whether the GOCO would be able to take into account the regional employment situations that arise in defence procurement. Will it have that flexibility?

[Lord Astor of Hever]

My Lords, I congratulate my noble friend on the outstanding questions that he asked during the Queen’s Speech debate. There were quite a lot of them and I was not able to answer them at the time or we would have been here even later than we were. However, I took them back to the department and the officials there were impressed by the depth of the questions. I thought it might be helpful to the House to make copies of the questions and the answers, so I have brought along copies which I am happy to distribute afterwards to any noble Lord because my noble friend’s questions were spot-on. I hope that, apart from the one question that was not properly answered, we have made a big effort to answer all the other questions accurately.

Taking my noble friend’s second question about regional employment issues first, the proposal will not address any specific issues of regional employment policy. The policy on this, as with other matters, will remain with central government and the Ministry of Defence.

As for second-guessing the GOCO, my noble friend will be aware that we will need to make decisions about what the Armed Forces need and then the GOCO will see them through.

[Baroness Symons of Vernham Dean]

My Lords, I welcome the Statement from the Minister and I particularly welcome the bipartisan way in which he approached it. Does the Minister agree, however, that there is an internal tension in defence procurement because of the very length of time that any procurement takes? The aircraft carriers, for example, have been at the top of the agenda for about the past 14 years, so inevitably these issues go from one Government to another. However, the tension is between maintaining some competition in defence procurement and, at the same time, recognising the importance of protecting the jobs and skills that we wish to secure for the future.

I disagree very much with what the noble Lord, Lord Hamilton, said about commercial discipline in the private sector. That may at times be important, but when the private sector concerned is a monopoly private sector, that rather undercuts the argument.

The Minister referred to briefings that he proposes to hold on this issue. Will those briefings be comprehensive in the way that we address this issue? If so, some of the very important issues that have arisen today can be treated not in the rather eclectic way that we are bound to see when we have this sort of discussion, but methodically, so that those of us who have some experience in this field can make a real contribution to the debate?

[Lord Astor of Hever]

My Lords, on the last point, I arranged a briefing—I am not sure whether the noble Baroness was there—at which the Minister for Defence Equipment, Support and Technology briefed noble Lords. He was hugely impressed by the depth of experience on all sides. He came to see me afterwards and asked if it would be possible to brief either individually or as a group. He is very keen to hear any suggestions and observations, and is aware that I am looking at noble Lords who have had huge responsibilities on this very subject in the past and know a great deal about it—a great deal more than I do. We are in the assessment phase. We are listening and learning and want to hear any suggestions. No decision will be made until next summer, so there is still plenty of time to hear what any noble Lord tells us.

Picking up on what the noble Baroness said, we obviously want to keep skills as far as possible and we feel that the GOCO would do that. We feel that of all the disciplines that it would bring to this, it would help to cut down the time taken for procurement. Taking the carriers as an example, with all the disciplines that it could bring, and being able to employ higher-paid people, it may be able to do things quicker. I do not want to take anything away from what DE&S has done—the noble Lord mentioned that—and I pay tribute to all the very hard-working civil servants and members of the Armed Forces who have worked there. However, they are constrained by Civil Service restrictions and we need to get more discipline and more incentive to get equipment for the Armed Forces quicker and more efficiently.

[Lord Hamilton of Epsom]

Following what the noble Baroness, Lady Symons, said, we are proposing a GOCO that may or may not turn out to be a monopoly. If it did turn out to be a monopoly, does my noble friend not agree that you are better off with a private sector monopoly than with a Civil Service one? Also, the prospect of competition being introduced after nine years will always be there, whatever happens to that GOCO.

[Lord Astor of Hever]

My Lords, we are talking about two things. We are talking about the GOCO but also a single-source regulation situation. We feel that the disciplines that we would place on the GOCO would ensure that there is not a monopoly.

[Lord Reid of Cardowan]

My Lords, could I add to my previous contribution lest noble Lords were confused by it? The innovation cycle of 14 months for digitally related equipment over a contract that may last, in the case of aircraft carriers, up to 14 years, means the constant demand for respecification of the initial contract to keep up with the latest and best. That, in my view, has contributed more than anything else to overruns and overcosts because they are a natural product of continual respecification.

[Lord Astor of Hever]

My Lords, the noble Lord makes a very good point. This is an area that the GOCO will have to struggle with—or if it is not GOCO, Civil Service-plus. I take on board everything the noble Lord said.