Defence Reform Bill

Lord Palmer of Childs Hill Excerpts

Tuesday 25th February 2014 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Lord, Lord Tunnicliffe, for raising a number of questions to which I am sure my noble friend will seek to reply. They were interesting issues. I also liked the noble Lord’s comment that it was an admirable attempt at an intractable problem. Indeed, such an attempt is being made, which is really the point. Let us hope it is an issue that is cross-party and of no party, which could be seen as a good thing.

The other interesting point made by the noble Lord was that the words spoken by the Minister will be followed by the industry. That is the point about this debate: the words that are spoken and reported in Hansard are what the industry can see and take confidence from, as well as the amendments before us. I was also grateful that the amendments are not an attempt to wreck the Bill. The noble Lord’s final comment—that they would enliven the debate—was a pleasant way of looking at this matter.

Clause 13 in Part 2 is an important technical advance that attempts to bring sanity to single-source contracts. Clearly, the clause is necessary, and the Motion to remove the clause is purely a technical effort to debate it. The issue in Amendment 18G relates to how one ratifies appointments, which it suggests should be done by a Select Committee. I ask the Minister whether, if any ratification by a Select Committee takes place, it should have to interview the applicants. That would surely be beyond what was necessary and would end up involving a comprehensive interview process, which would be too much. The point made by the noble Lord was about how much influence and power would go to the Secretary of State, rather than to some other body of people. Although the Secretary of State must be allowed to have influence, he should not be the person taking the real decision as to who is supported.

When the Minister replies, I hope that she will also deal with a question not raised by the noble Lord, Lord Tunnicliffe. Should the Single Source Regulations Office be the sponsoring department? Should the sponsoring department be the MoD? What about the Department for Business, Innovation and Skills? I have raised this matter with the Minister on other occasions, not only in this context. Here we have a department, the Department for Business, Innovation and Skills, whose raison d’être is to sell and encourage business and industry, but the brief of the Ministry of Defence is also to engage in contracts, selling and so on. Indeed, that ministry sells overseas and I often wonder why we do not look holistically at how we deal with selling this country’s products. I wonder why, in the context of this amendment, the sponsor of the SSRO should be only the Secretary of State for Defence. Why should it not also or instead be the Secretary of State for Business, Innovation and Skills?

[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.

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[Lord Tunnicliffe]

My Lords, in moving Amendment 18P I will speak to the rest of the amendments in this group. The points I want to make are simple, but I look forward to the reply I shall receive to these simple ideas.

The group essentially refers to Clauses 19 and 20. Clause 19 addresses the issue of the contract profit rate and, essentially, the amendments would require that the rates must be set by regulation each year. Amendments 23A and 23E turn this into an affirmative-procedure process.

More interesting is Clause 20, “Allowable costs”. As the report of the noble Lord, Lord Currie, points out, we have over the years had a lot of debate, effort and negotiation into the contract profit rate which, typically, is 10%—pedantically, it is 9%—of the total price; and too little, one might argue with the benefit of hindsight, into the issue of allowable costs, which represent 90% to 91% of the total price. Therefore, Clause 20 properly addresses this issue.

Subsection (1) states:

“The SSRO must issue guidance about determining whether costs are allowable costs under qualifying defence contracts”.

Subsection (2) attempts to define allowable costs. It is important to emphasise that these are the big bucks. This is where the big money is in the contract. This is 90% or more of the total price. The guidance we get from the primary legislation is that they must be appropriate, attributable to the contract and reasonable in the circumstances. Much as I praise this part of the Bill—and I do as it is a really good attempt to address this extremely difficult issue—I cannot but be amused by these three descriptors of one of the most important elements. I remember that when I was privileged to be in the noble Baroness’s position, whenever an official used the word “appropriate” in my response, it meant we did not have an argument, so I dismiss subsection (2)(a) as pretty well irrelevant. I do not have a lot of time for paragraph (b) either, because if it is not “attributable to the contract”, who would in all conscience try to argue that it should be there? We are left with “reasonable”. Much as I applaud the concept of being reasonable, it is not a very full description. Therefore, inevitably, and quite properly—I am not unhappy about this—it will have to be left to the SSRO to develop guidance about it. However, surely this is so important that it should not be merely guidance but should be in regulations. Regulations of this importance should be exposed to public gaze and debate and should be accountable to Parliament through the affirmative procedure. I beg to move.

[Lord Palmer of Childs Hill]

My Lords, I, too, am worried about these words. I shall not repeat what the noble Lord, Lord Tunnicliffe, has said. It is really a question about what are allowable costs. As anybody in business knows, allowable costs can be described in so many ways. For instance, Starbucks does not pay any tax in this country because it charges its royalties from overseas against its costs in this country. Would that on a contract for a submarine be allowable costs? If the contractor is producing, let us say, one submarine, can it therefore charge all of its chairman’s, managing director’s and executive board’s salaries against the cost of that one submarine? If it is also producing a group of battleships or carriers, those executive costs, for example, would be spread over all the costs of all those items of equipment.

In her previous reply, the Minister spoke about an audit trail. The noble Lord, Lord Tunnicliffe, used the word “reasonable” and all the other adjectives. A contractor who wished to drive a coach and horses through this could do so by manipulating what could be administrative costs. It is very easy to say that if the mythical submarine requires a widget, that widget is applicable to that submarine. You can see that, but when you are dealing with, let us say, the premises for the submarine, if it is one submarine, is the contractor allowed to charge the whole of the premises costs against the cost of that submarine? If it was also building an aircraft carrier, it could charge some of that premises costs against it. I invite the Minister to come back, perhaps on Report, with some better reassurance about how allowable costs will be allocated and particularly about how to spread large costs if only one item of equipment is produced by that contractor.