Government Procurement Policy

Lord Lee of Trafford Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Lee of Trafford]

My Lords, I congratulate the noble Lord, Lord Sugar, on securing this important debate. I also declare a number of shareholdings in defence companies that are listed in the Register of Lords’ Interests, because I shall talk about defence procurement.

The problems and complexities of defence procurement have been with us for many years. Twenty-five years ago, when I was a junior Defence Minister, we were spending £1 million an hour, every hour, on equipment for our Armed Forces. One of my officials at that stage told me that we could probably have built the whole of the then naval requirement in the Vickers yard at Barrow, and we did not need the half dozen other naval yards. We had a substantial problem of overcapacity.

As a Minister, I was subject to a substantial amount of lobbying in the Division Lobbies in the other place—not least by the noble Lord, Lord O’Neill, who is sitting in his place and from whom we will hear later. Fairly, he lobbied hard for orders for the Scottish yards. We started a NATO frigate programme that got nowhere. We ordered three new conventional submarines that were never used and were subsequently sold. We had major problems with the Nimrod software, and I remember calling in the head of Ferranti. The then Secretary of State, Michael Heseltine, now the noble Lord, Lord Heseltine, brought in Peter Levene, now the noble Lord, Lord Levene, at a salary unheard of in the 1980s of £100,000 a year to bring competition into defence spend and to move away from single sourcing. Incidentally, today 40 per cent of contracts are still placed on a non-competitive basis, amounting to about £9 billion a year.

In 1997, the NAO reported that the 25 largest defence equipment projects under way at that time were £3 billion over budget and, on average, entered service three years late. By 2009—12 years later—the situation had got worse. Bernard Gray, in his report commissioned by a Labour Government, concluded that the MoD was running a “substantially overheated” equipment programme, with,

“too many types of equipment being ordered for too large a range of tasks at too high a specification”.

On 9 July that year in your Lordships’ House I said that,

“in the private sector, if one trades when one knows that one’s operation is insolvent, that is a criminal offence. At the present time, the Ministry of Defence, frankly, is bust. There is a yawning gap between resources and commitments”.

The noble Lord, Lord Drayson, replied:

“My Lords, I am afraid that I do not recognise at all the characterisation that the noble Lord has just set out”.—[Official Report, 9/7/09; col. 760.]

I think it is accepted that when the coalition Government came to power there was an unfunded liability over the next 10 years of about £38 billion. The noble Lord, Lord Davies, who will speak a little later, may well comment on that. I am not endeavouring to make any party-political points, because the problems of defence spend and procurement transcend party politics. I think it is accepted that we have had too much gold-plating, too much specification-changing, too many personnel changes in contract responsibilities and too little co-operation with our European allies on procurement issues. The EDA—the European Defence Agency—estimated that there were 16 separate procurement programmes for armoured vehicles alone. Only days ago, the NAO’s Major Projects Report concluded that we were overrunning by £6 billion on 15 major projects over the past three years, including a £1 billion cost increase on the Astute submarine programme. Of course, we know that £3.4 billion was spent on cancelling Nimrod maritime patrol aircraft.

We also learnt very recently that the MoD had spent something like £550 million on consultancy fees, with one firm, AlixPartners, apparently charging at the rate of £4,000 per consultant per day. In broad-brush terms, industry negotiators have run rings around the MoD over the years. I have tabled a Written Question, which is awaiting answer, asking the MoD to list the six highest salaries that it pays to civilians. My guess is that these will be relatively modest, given the size of the MoD budget. My question is: should we offer really competitive salaries to recruit the best—a point made by the noble Lord, Lord Sugar—and perhaps not need to spend anything like so much on consultancies?

I am encouraged by the number of new initiatives to improve defence acquisitions that are currently under way, including: the establishment of a new major projects review board; a review of single-source contracts by the noble Lord, Lord Currie; a new material strategy, including options for the future of defence equipment and support organisation under Bernard Gray; and reviewing and renegotiating up to 500 contracts with a value of £8 billion. That is all very laudable; let us hope that significant improvements are achieved.

On jobs and employment, defence spend sustains something like 300,000 jobs. Leaving aside for another day the whole question of R&D spin-off and the operation of SMEs—I think that my noble friend Lord Palmer will refer to SMEs a little later—at present there is a presumption that there should be off-the-shelf purchasing wherever possible. At a time of considerable economic difficulty in this country with high unemployment, we have to be very careful to balance value-for-money purchases with jobs at home. Indeed, that has always been the case.

In conclusion, I would like two things to happen: first, greater industry consolidation across the defence sector, particularly in Europe, because only then will we begin to see a real rationalisation of defence equipment and procurement among our European allies and ourselves; and, secondly, if possible, cross-party agreement to the spending of a specific percentage of GDP on defence, coupled with a Treasury commitment to a guaranteed 10-year funding programme, as there is in Australia, thus giving a firm base on which long-term procurement commitments can be entered into.