Defence Reform Bill

Debate between Lord Craig of Radley and Baroness Jolly

Tuesday 25th February 2014 Grand Committee

[Lord Craig of Radley (CB)]

The noble Lord, Lord Tunnicliffe, has raised in a variety of ways the issue of the independence of the SSRO from government. I raised one further point on that at Second Reading. I got a reply, but I was not absolutely confident that it provided the right answer. The point I made was that the SSRO has an interest in value for money, but so has the Treasury throughout government. I asked to what extent the SSRO stands free of, or is supervised by, the Treasury. For the record, it would be helpful to have that point covered once again. If I remember correctly, I got a very full answer from the Minister, the noble Lord, Lord Astor of Hever, but I was not absolutely happy that it gave a feeling of the pure independence of the SSRO from the Treasury.

[Baroness Jolly (LD)]

My Lords, I thank noble Lords for their comments at the beginning of this fourth day in Committee. In particular, I thank the noble Lord, Lord Tunnicliffe, and commend him for his preparation for the scrutiny in this Committee stage. I apologise in advance to noble Lords because some of my earlier speaking notes are quite lengthy, but they get shorter. The purpose of the length is that we need much of this on record.

Clause 13 is at the heart of the reforms to single-source procurement. It establishes the Single Source Regulations Office, a small, arm’s-length body responsible for keeping the new framework under review, monitoring adherence and providing expert determination between the MoD and single-source suppliers. It is therefore essential to the success of these reforms. Clause 13 also establishes in law the overriding aim of the SSRO to assure that good value for money is obtained in government expenditure on qualifying single-source defence contracts and that defence suppliers are paid a fair and reasonable price under those contracts.

The creation of an independent body is absolutely central to the success and longevity of the framework. I cannot say this too strongly. The purpose of this body is to be independent and transparent, thus giving confidence to both parties who need to play in this area. It was a key recommendation of the independent review conducted by the noble Lord, Lord Currie. The SSRO will replace the existing Review Board for Government Contracts, which, as the noble Lord, Lord Currie, identified, has, through no fault of its own, failed to evolve to reflect changing circumstances, largely because either party can block any change that it regards as contrary to its own interests.

Clause 13 brings into effect Schedule 4, which establishes the governance structure of the SSRO. In this we have closely followed guidance published by the Cabinet Office on executive non-departmental public bodies and have considered existing governance arrangements for similar bodies, such as Monitor. So we have not started with a blank piece of paper and, as the Committee will see, with the following key characteristics of the SSRO, the structure we have created is in common with other similar public bodies. It has a separate chair and chief executive and a board which has a majority of non-executive directors, which is aligned with best practice in the Financial Reporting Council’s UK Corporate Governance Code and Cabinet Office guidelines. Non-executive members of the SSRO should be appointed for a period of between three and six years to assure a staggered process of appointments to the key positions. There will be a process that allows the Secretary of State to remove or suspend a member from office on the grounds of failure to carry out his or her duties, incapacity, such as ill health, or misconduct, which rightly follows Cabinet Office guidance on the creation of public bodies. The SSRO will have the ability to appoint its own employees, which is consistent with Public Bodies: A Guide for Departments, produced by the Cabinet Office; and, in accordance with the Cabinet Office’s guidance on good corporate governance in executive NDPBs, the SSRO’s committee structure will be the body that makes key binding determinations, including where there is an appeal from one of the parties to a qualifying defence contract. We have listened to industry requests in this area, and have agreed that committees can contain members who are not employees or members of the SSRO.

The SSRO will also have separate responsibilities to the Secretary of State, the Auditor-General and Parliament. These, which are set out in Schedule 4, include the provision of annual accounts which are consistent with international finance reporting standards, which will be audited by the National Audit Office. These accounts will be prepared between three to six months of the end of the financial year. An annual report on its activities must be provided by the SSRO to the Secretary of State, who in turn will lay the report before Parliament.

As the sponsoring department of the SSRO, the Secretary of State will make payments to the SSRO to finance its operations. This is in common with Cabinet Office guidance on the funding of ENDPBs. There will be a framework agreement established between the MoD and the SSRO that sets its budget, in accordance with HMT’s guidelines in Managing Public Money and performance targets. The SSRO will be jointly funded by the MoD and industry, but we have agreed with industry that the MoD will pick up its costs over the first three years, as it is established and until we determine its precise annual running costs. The SSRO will be allowed to borrow money only on a temporary basis up to an overdraft limit set by the Secretary of State. There may be occasions where the SSRO has a higher number of adjudications or determinations that it is administering, where it may require additional resources to meet its objectives in a timely fashion.

We have given the SSRO the ability to pay pensions to its non-executive members. This is not because we intend to pay a pension to every non-executive member the SSRO appoints; rather, we have done this to give the Secretary of State the flexibility to recruit non-executive members from both the private and public sectors who may have existing pension arrangements. Other elements of Schedule 4 ensure that the SSRO will be a body that is subject to the Freedom of Information Act 2000, allow the parliamentary commissioner to investigate the SSRO, and ensure that its staff are not civil servants.

This clause is therefore crucial to the overall establishment of the SSRO and the functioning of the new framework. The SSRO will, over time, become an independent expert in defence single-source pricing, ensuring that we do not need to wait another 45 years for this framework to be reviewed again. It is therefore crucial that this clause is retained in the Bill.

Amendments 18G and 18H revolve around a concern, primarily expressed by industry, but also by the noble Lord, about the independence and impartiality of the SSRO. I assure noble Lords that we are committed to ensuring that the SSRO will be both independent and impartial. The credibility of the new single-source framework rests upon this. For example, the SSRO can act as an independent adjudicator in the event of disputes between parties and it is the appeal body to which industry can refer if we apply a civil penalty to it. Perhaps even more significantly, it annually recommends the profit rate and recommends changes to the framework as part of the quinquennial review process. It is the guardian of the new framework and its impartiality is at the core of the dual aims under Clause 13 of ensuring a fair and reasonable price for contractors and value for money for the Government.

If the SSRO was perceived as being partial, this would create great difficulties. If the perception was that it was too biased towards the Government, shareholders could decide that the defence sector was no longer worth investing in and our suppliers could be driven to leave it. If the perception was the other way—as too biased towards our suppliers—we would seek to change the framework entirely or we would exempt our contracts from it and thus lose the protections we are establishing in this Bill. Neither of these outcomes serves either the MoD or our single-source suppliers. It is the need for independence and impartiality that has led to our desire to set up the SSRO in the first place. The current framework requires consensus to change. This has meant that for 45 years, any change that one side has felt puts them at a disadvantage has been blocked. This is the principal reason why the old system has remained frozen in time for so long. Consensus will not serve us. The alternative, a statutory framework determined entirely by the MoD, would always be resisted by industry. There would be a risk that over time the framework would become steadily more one-sided and that industry would be driven out of the sector, so this option is also not desirable. What we need is an independent body, namely the Single Source Regulations Office.