Defence Reform Bill

Lord Astor of Hever Excerpts

Tuesday 10th December 2013 Lords Chamber

Moved by

[Lord Astor of Hever]

That the Bill be read a second time.

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

My Lords, our Armed Forces do an exceptional job and I am sure that all of us in this House will wish to pay tribute to their dedication and the sacrifices they make to keep this country safe. But the Armed Forces can defend the country and protect our national interests only if we provide them with the manpower, equipment and support that they need. In particular, making sure that our Armed Forces have the right equipment, delivered on time and to the right specification, is essential if we are to maintain our capabilities into the future. Making full use of the expertise and skills of our Reserve Forces is also crucial if we are to meet the security challenges that we face over the next decade and beyond.

Let me start this debate by addressing the issue of the reform of the Defence Equipment and Support organisation, which is covered in Part 1 of the Bill. My right honourable friend the Secretary of State for Defence made a Statement earlier today in the other place, and I would like to set out what that said.

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 that 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 unsatisfactory outcomes for the Armed Forces and the taxpayer.

The significant reforms that we have already instituted to DE&S are only a start. A more radical reform of DE&S is necessary if it is to sustain the skills that it requires to support our Armed Forces effectively. That is why we developed the matériel strategy programme, which is designed to remove the obstacles to bringing in critical skills by exploring alternative models for DE&S. It was 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, through a competition, to test the market’s appetite for that model and confirm that it would deliver value for money.

In parallel, it was 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 were received.

On 19 November my right honourable friend the Secretary of State informed the other place that we had reached the detailed proposals stage of the competition, with only one bid being received from the two consortia remaining in the process. That bid was from Materiel Acquisition Partners, a Bechtel-led consortium. The Government made clear that we would consider carefully how best to proceed in the light of this development. It has now been confirmed that we 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 that 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 intermediate stage, a judgment has had to be made 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. Although the remaining consortia presented us with a credible and detailed bid, we do not have a competitive process. It has therefore been concluded that the risks of proceeding with a single bidder are too high to be acceptable.

We believe that a GOCO remains the best 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 delivery challenges facing DE&S in an acceptable timescale is with the injection of a significant element of private sector support. It has therefore been decided to build on the DE&S-plus proposition, transforming DE&S further within the public sector, bringing in that private sector support and ensuring that it 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. The new entity will be at arm’s length from the rest of the MoD, with a separate governance and oversight structure—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. This will deliver another of the recommendations from the noble Lord, Lord Levene. Crucially, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury, around how it recruits, rewards, retains and manages staff along more commercial lines to reflect its role in managing some of the most complex procurement activity in the world.

These changes will reinforce the relationship between the military command customers and DE&S, leading to 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 support through a series of contracts to deliver key changes to systems and processes and to support programme management while organic capabilities are built. They will 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 to the continuing DE&S reform agenda from the original Gray report. Alongside the changes to DE&S, we will also continue with the reform of our wider acquisition system, which is focusing on making us a more intelligent customer—a key role for our military, alongside the important role it will continue to play within the 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 retest the market’s appetite for continuing the DE&S evolution into a GOCO and its ability to deliver guaranteed value for money against a match-fit public sector comparator. On both counts, this course of action represents the best way forward for our Armed Forces and for the taxpayer.

Part 2 of the Bill sets out a statutory framework for defence contracts awarded in the absence of a competitive process. The White Paper on defence acquisition published in June this year included important changes to our single-source procurement regime. These changes follow the independent report on single-source procurement that was carried out by the noble Lord, Lord Currie of Marylebone, in 2011. Although competition is our preferred approach, the need to maintain critical national industrial capabilities or sovereign control of the intellectual property in equipment programmes sometimes requires us to place contracts without a competitive process. Single-source procurement typically accounts for about 45% of the total the MoD spends on defence equipment and support, or about £6 billion per year, and 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, putting value for money at risk. The absence of an alternative supplier also undermines our contractual negotiations because we have a duty to provide our Armed Forces with the equipment they need, and our suppliers know we cannot go elsewhere. These are serious shortcomings, and we need to address them with an approach to single-source procurement that ensures we get value for money, while still allowing our suppliers a fair and reasonable price, and where the safeguards we need are not regarded as voluntary and a matter for negotiation.

The MoD currently uses a framework for single-source procurement which has remained largely unchanged for the past 45 years. Under this system, which is voluntary, the profit contractors can earn is fixed and there are few incentives for them to reduce costs. The noble Lord, Lord Currie, recommended a new framework: one that is based on transparency, with much stronger supplier efficiency incentives, and which is underpinned by stronger governance arrangements. Based on his recommendations, and following extensive consultations with our major single-source suppliers, we have developed the framework provided for in Part 2.

The Reserve Forces make an essential contribution to delivering the nation’s security at home and overseas. They are an invaluable part of our Armed Forces, working alongside their regular counterparts to deliver military capability. On 3 July this year, we published a White Paper that set out a range of measures for revitalising the Reserve Forces, reversing the decline of the recent past, growing their numbers and investing an additional £1.8 billion over 10 years in their training and support. These measures include improved training and more opportunities for reservists to train overseas, enabling them to undertake the same range of military tasks as regulars, including overseas capacity building and responding to crises at home. The tax-free annual training bounty will be developed to recognise commitment, encourage retention and reward the appropriate level of capability. Reservists will also have improved access to healthcare and better access to welfare support. This will provide reservists with a challenging and rewarding experience. The Bill before us today includes the legislative changes needed to help modernise and make greater use of our reserves and to ensure that both they and their employers are treated fairly.

Part 3 of the Bill makes changes to the Reserve Forces. First, it extends the current powers to call out members of the Reserve Forces. This will allow reservists to be called out for any purpose for which regular forces may be used. Secondly, it allows the Secretary of State, by regulations, to provide for the making of payments to employers to incentivise the recruitment and retention of reservists. Thirdly, it provides improved employment protection for reservists by allowing a right of access, without a qualifying employment period, to the employment tribunal for unfair dismissal where dismissal relates to their reserve service. In addition, the Territorial Army will be renamed the “Army Reserve” and the Army’s ex-regular reserve force will be renamed the “Regular Reserve”.

The support of employers is crucial to delivering the future Reserve Forces and we seek to strengthen the Ministry of Defence’s relationships with employers. The White Paper set out how we will do this by making liability for call-up more predictable, making it easier for employers to claim the financial assistance that is already available and introducing a new employer recognition scheme building on the corporate covenant to ensure that reservist employers receive the recognition that they deserve. We acknowledge that reserve service can have a particular impact on SMEs. We understand these challenges and believe that our measures, particularly those around providing employers with greater predictability, greater transparency and financial support, will be especially important for SMEs, which is why we will increase financial support for small and medium-sized enterprises by introducing a financial award of up to £500 a month per reservist when any of their reservist employees are mobilised.

The House will be aware that on Report in the other place, my right honourable friend the Secretary of State signalled his intention to accept in principle a change to the Bill to provide for some form of annual external scrutiny and reporting on the arrangements for the Reserve Forces. This is an important change that will ensure that Parliament has access to independent advice about the Reserve Forces and the regular opportunity to review these matters. Given this, the Government intend to bring forward a suitable amendment to the Bill in Committee.

I very much look forward to our debate this afternoon. I believe this Bill strikes the right balance between ensuring we deliver the military capabilities that our Armed Forces need and making sure that value for money is provided to the taxpayer. I therefore commend the Bill to the House.

I beg to move that the Bill be committed—

[A noble Lord]

Nice try.

--- Later in debate ---

[Lord Astor of Hever]

My Lords, we have had a constructive and well informed debate on the Bill. I share the generous thoughts of the noble Baroness, Lady Dean, about Lord Gilbert. The debate has shown that there is a large degree of consensus on the need to reform the way in which we manage and deliver our defence capabilities. It is important that we provide our Armed Forces with the equipment and support they need and that we take the appropriate measures to ensure that the Reserve Forces can be used as part of the integrated Future Force structure with individual reserves appropriately protected in their role and their employers better rewarded for the contribution they make in supporting the Reserve Forces.

The measures set out in the Bill represent a real change to how the Ministry of Defence will conduct its business in future. They will allow us to ensure that equipment and capabilities are delivered on time, on budget and to the right specification.

At this point, I am going to cut short my speech as I have been bombarded with questions, and I will try to answer as many as I can tonight. There is no way I will be able to answer all of them, so I will write to all noble Lords who asked questions and copy in other speakers.

The noble Lord, Lord Rosser, and other noble Lords asked why Part 1 should remain if we are no longer proceeding with the GOCO. I am well aware of the mood of the House on this issue. We believe that a GOCO remains a potential future solution for transforming DE&S once we have put in place a more robust baseline from which to contract with a GOCO partner. It would therefore be prudent to have Part 1 in place should a future Administration decide to go the GOCO route. We very much hope that the new DE&S-plus organisation will be robust and successful. We should not be afraid of the competition that potentially testing the market for a GOCO in three to five years’ time would provide. Keeping the possibility of a GOCO would provide an incentive for a new organisation to maximise its performance.

The noble Lord also asked what “at a future date” means in relation to a possible future GOCO. We do not envisage reopening the GOCO option for at least two to three years, certainly not before the next election.

The noble Lord asked how much money has been spent on the GOCO commercial process and whether the Bechtel consortium will now make a claim against the MoD for the money it has spent on the bid. This was also asked by the noble Lord, Lord Davies. We have spent £7.4 million on supporting our work on the GOCO option. The money is not wasted. We have gained valuable insights from this work that have not only helped us understand the commercial landscape but will stand us in good stead for the new organisation. On Bechtel, we have always made it clear that we will not pay bid costs.

The noble Lord asked about the draw-down of regulars prior to build-up of reserves. We have had no choice but to reduce regulars to stay within the budget. The cost of 20,000 regulars is £1 billion a year. In line with the SDSR, there is a drawing down in some areas to build up in others, such as cyber, as the noble Lord knows. This is about doing defence differently.

[Lord Lee of Trafford]

My noble friend has just given an indication of the cost of the GOCO option so far. I draw his attention to a reply to a Written Question I had tabled:

“The Materiel Strategy programme is currently in the Assessment Phase and is considering two options … The Concept Phase of the programme started in May 2011 and analysed a number of different operating models. It concluded with the approval of the Initial Gate Business Case in April 2013 and cost £12 million. The Assessment Phase is currently developing both DE&S+ and GOCO options”.—[Official Report, 18/11/13; col. WA135.]

Perhaps my noble friend might like to look at that.

[Lord Astor of Hever]

My Lords, when I come to answer my noble friend’s questions, I will touch on the assessment phase and come up with some figures which may be helpful to him.

The noble Lord, Lord Rosser, asked for the latest update on recruiting. The quarterly personnel report of 14 November had trained and untrained strength of reserves, inflow and outflow. The Secretary of State will publish recruitment targets before the end of the year. The noble Lord asked about Capita recruitment. We have been very open about the fact that there have been teething problems. The Army and Capita are fixing these. The new website will be up and running in January, and there will be a faster recruitment pipeline. Temporary adjustments have been made to applications to ensure that we continue to progress new recruits. We want to cut out any blockages there.

The noble Lord, Lord Levene, suggested that we stop running down the abilities of civil servants. I agree with the noble Lord and pay tribute to those civil servants in the MoD, who certainly give me excellent advice. The noble Lord asked for a definition of the difference between DE&S and DE&S-plus. This is quite complicated, and I will write to the noble Lord and make sure that all other speakers get a copy of that.

The noble Lord and my noble friend Lord Lee asked why there was no competition for the chief executive post. The simple fact is that the CDM has an extant contract that takes us past 1 April, when the new trading entity will stand up. His post as CDM will morph into the chief executive role. Furthermore, realistically, there would have been no chance of selecting and appointing anyone else in time for them to stand up the new organisation on 1 April. He will also provide a vital thread of continuity from the Gray report into the continuing reform agenda.

Going back to the note that I said that I would write to the noble Lord, I will undertake to do that before the Bill moves into Committee. The note will set out the different models.

The DE&S civilian staff will remain civil servants—a point that the noble Lord raised. Their status will not change. Members of the Armed Forces will continue to make a valuable contribution in DE&S as they do today. We will be able to create a more businesslike organisation which is better able to recruit, reward, retain and manage its staff. In terms of recruiting, we will be using private sector expertise to help DE&S-plus get match-fit, including in terms of its HR transformation.

My noble friend Lord King mentioned the deferral of mobilisation. It is already possible for a reservist or their employer to ask for mobilisation to be deferred. For an employer, one of the criteria for deferral is the impact that mobilisation would have on the business.

I am glad that my noble friend Lady Garden mentioned the cadet debate of a couple of weeks ago. I listened to some of the speeches in this Chamber and was most impressed. I will write to my noble friend about careers advice for cadets. She asked whether there was any skills audit of current DE&S staff. The answer is no, but we undertook a detailed assessment of DE&S business capabilities in the early part of the materiel strategy, which looked at the issue of skills.

The noble and gallant Lord, Lord Stirrup, pointed out that we must focus not just on a single factor as we reform DE&S. We recognise the complexity of defence acquisition, and will continue to do so.

The noble Baroness, Lady Dean, asked about the proportion of regulars recruited to reserves. There are incentives for ex-regulars to join reserves. Those who leave the Army through redundancy are being encouraged to consider a part-time military career in the reserves. For the Army, ex-regulars who enlist into the Army Reserve within three years of leaving regular service can enjoy a number of incentives and benefits, such as reduced Army Reserve commitment and training requirements or, alternatively, a commitment bonus worth £5,000 paid over four years. There is a comprehensive information campaign to ensure that all service leavers, not just redundees, are aware of the opportunities and benefits of joining the reserves.

The noble Baroness asked who is running recruitment; it is Capita, which is working closely with the Army to fix the teething problems. She asked whether tranche 4 redundancies were to be paused. No final decision has been taken on that. Also on the regular to reserve transfer, 459 applications have been made to the commitment bonus scheme, of which 316 were from ex-regular other ranks, 35 from ex-regular junior officers and 108 from direct entry—that is, not ex-regular—junior officers. I understand that this is quite complicated, and I shall write to the noble Baroness and set it all out, copying in other noble Lords.

The noble Baroness asked whether having the legislation in Part 1 would not be a sword of Damocles over the DE&S-plus option. No, we do not see it like that at all. We are constantly striving to improve performance. The innovative structure will move us forward, but the underpinning rationale for a GOCO remains in place and could represent a further evolutionary step. Part 1 being in place will not mean that we have to proceed with a GOCO in future, but it will keep the option open.

My noble friend Lord Lee asked a number of questions. He asked whether a GOCO was the department’s favoured option. When the Secretary of State announced the materiel strategy proposals in June, he was explicit in saying,

“we have not yet accepted the GoCo concept as the chosen outcome; we are conducting an assessment”.—[Official Report, Commons, 10/6/13; col. 54.]

My noble friend asked, as did the noble Lord, Lord West, whether Bernard Gray would resign. No, there is no need for that; what matters is that we drive forward the reform of DE&S. Bernard Gray will do that as chief executive of the new organisation.

My noble friend asked whether the chairman of the new organisation’s board would be executive or non-executive. The answer is non-executive; we will have strong oversight of the new organisation. We were asked how we would recruit the new people. We will use the private sector expertise that we plan to bring in through business partner contracts to help us to deliver a transformed HR. This will include getting the best out of freedoms that we have agreed with Her Majesty’s Treasury and the Cabinet Office, which are necessary for the new DE&S.

My noble friend mentioned Her Majesty’s Treasury. We have agreed with the Treasury and, indeed, the Cabinet Office that we must have freedom to be able to operate effectively. We are confident that we will get these. It is one of the reasons that we are setting this up as a bespoke entity. How much have we spent so far on this? I gave the figure of £7.4 million to the noble Lord, Lord Rosser. We have spent some £17.8 million on the assessment phase of this complex change programme to determine the best way to deliver what we need. This investment, which excludes the cost of MoD staff, has included work on the GOCO, the DE&S-plus option, and on the necessary changes to the customer.

My noble friend asked how much we have spent on consultants. The MoD spent £68 million on consultants in 2012-13. Going back to the freedoms, we do not yet know details of these, but they will be significant. Her Majesty’s Treasury recognises the need for significant freedoms around salary for DE&S-plus. I will write to my noble friend when I have more information. This is obviously a very important issue and I will copy in other noble Lords on it.

My noble friend asked about Bernard Gray’s salary, as did the noble Lord, Lord Davies. I understand that Bernard Gray will continue on his existing terms, but I cannot confirm that today. His current salary is around £220,000 per annum. My noble friend asked whether the potential GOCO competition would make it harder to recruit from the private sector. This is simply not the case. Those we are trying to recruit would see GOCO as an opportunity, not a threat.

The noble and gallant Lord, Lord Craig, asked about ministerial notification and early availability. It is important that Ministers oversee a call-out. We will seek to provide employers with as much notice as possible and arrangements already exist for high-readiness reserves who can be mobilised at short notice. I will write to the noble and gallant Lord on this issue.

My noble friend Lady Doocey asked about mental health and housing. I have very detailed answers but, rather than test the patience of the House tonight, I will write to my noble friend on those matters. I have a very full answer that I think she will be happy with.

The noble Lord, Lord Davies, made a very political speech and asked whether the potential GOCO contract would make it hard to recruit from the private sector, as did my noble friend Lord Lee. We do not believe that is the case. The people we are trying to recruit would see GOCO as an opportunity, not a threat. The noble Lord asked whether there was a special deal for Bernard Gray. His role will continue beyond 1 April on his existing terms and conditions. He provides a vital link between the work done so far and the new organisation.

The noble Lord, Lord Tunnicliffe, gave me sight of his questions. I can confirm that legislation is not required to establish the bespoke entity that we announced today. However, legislation is required to establish an effective GOCO and that remains a possible future option. If we do not have the legislation in place then, that could inhibit a future competition.

We still have to work out the detail of specific freedoms and authorities. However, as I said, the Treasury and the Cabinet Office have been working with us to ensure that this innovative structure will be permitted significant freedoms and flexibilities. I have already undertaken to write to noble Lords on this very important issue.

DE&S civilian staff will remain civil servants—their status will not change—and members of the Armed Forces will continue to make a contribution to DE&S, as they do today. We will be able to create a more businesslike organisation which is better able to recruit, reward, retain and manage its staff.

The Bill provides the legislation we need to make far-reaching changes to the way in which we deliver our defence capabilities. The changes set out will not only improve the support we give to our Armed Forces but make specific improvements for reservists and their employers, who are an integral partner in enabling the Reserve Forces. The measures in the Bill will also help to ensure that the taxpayer gets value for money. We must not miss this opportunity to make essential changes to the way we manage and deliver defence in the future. I therefore commend the Bill to the House.

Bill read a second time and committed to a Grand Committee.

House adjourned at 6.20 pm.