Defence Reform Bill

Lord Roper Excerpts

Tuesday 25th February 2014 Grand Committee

[Lord Roper]

My Lords, I, too, was surprised to read these words. I had looked in the draft regulations to see whether there is anything within them which would help us. There is not. There is a reference to allowable costs in paragraphs 13 to 15, but that merely refers us back to Clause 20. It does not develop the concept of allowable costs, as I believe the noble Lord, Lord Tunnicliffe, rightly suggested it should. I wonder whether the Minister will be able to tell me that this could be looked at in the final version of the draft regulations.

[Baroness Jolly]

My Lords, Amendment 18P would have the effect of directing the Secretary of State for Defence to provide Parliament annually with a determination of the contract profit rate and, specifically, the process that is to be used to determine the profit rate. Before considering the amendment, it will be worth while outlining the existing process that the Bill provides for.

Under Clause 17, the contract profit rate is to be determined through six steps. Three of those steps will be determined with reference to rates that are to be calculated annually: step 1, the baseline profit rate; step 4, the SSRO funding adjustment; and step 6, the adjustment for capital employed by the contractor. Two of these steps are not new; steps 1 and 6 have their equivalents under the existing regime. The rates to be used in determining these three steps must themselves be determined annually as they will reflect the most recent accounts of companies and the SSRO in relation to the SSRO funding adjustment.

The process for determining these rates is provided for by Clause 19 and has several stages. First, the Secretary of State will issue statutory guidance containing the principles that should be used in determining the rates. Secondly, the SSRO must recommend rates, having regard to the Secretary of State’s guidance, by 31 January each year. Thirdly, upon receiving the SSRO’s recommendations, the Secretary of State must then determine and publish in the London Gazette no later than 15 March each year the rates to be used. In publishing the rates to be used, the Secretary of State must also publish the reasons for any differences from the SSRO’s recommendations.

I appreciate that at first sight this may appear to be an unnecessarily complicated process, but it has been carefully considered to fulfil a number of requirements: first, for the Secretary of State to be able to set out clear guidance on the principles that should be used in determining the rates; secondly, and crucially, for the SSRO as the independent and impartial body to be free to recommend rates in accordance with its statutory aim to set a framework that delivers a fair and reasonable price. While the SSRO must have regard to the principles established by the Secretary of State, it should also be free to consider any other matters that it considers relevant to the setting of the rates. It must be able to recommend the rates that it considers will provide a fair and reasonable return to contractors and value for money to the Government, even if that means not following the principles set out by the Secretary of State.

The amendment would require that the powers conferred by Clause 19 should be contained in regulations made by statutory instrument and therefore be subject to the same level of parliamentary scrutiny as the other regulations. While I appreciate that Parliament should exercise an appropriate level of oversight in these matters, I do not think that this proposal is proper in this instance. First, I note that this would form a potentially unhelpful precedent across government, since, as far as I am aware, none of the other regulatory bodies—such as for the railways or water—are subject to this degree of parliamentary scrutiny, even though they deal with issues of great national significance. Secondly, the Secretary of State for Defence is already subject to parliamentary oversight for his powers over the defence budget and is therefore accountable to Parliament for how he discharges these powers. The amendment would add an unhelpful degree of additional and overlapping scrutiny for this specific area of his responsibility.

In addition, this is clearly a very technical and complex issue and there is a risk that making this area subject to parliamentary debate would lead to the politicisation of profit rates which ought to be set through impartial and expert judgment. There would be scope for Parliament to be subjected to lobbying by the various interest groups, a factor that could result in pressure to set the rates either too high or too low.

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[Baroness Jolly]

This group of amendments relates to the regulations that are to be made by statutory instrument under Part 2 and the consultation and parliamentary procedures by which those regulations may be made. There are seven amendments in this group, and I will deal with the government amendments first.

The Bill currently provides for two separate sets of regulations to be made by statutory instrument. The first is the single-source contract regulations—SSCRs—which are introduced under Clause 14(1). The SSCRs would contain all the regulations with the exception of those made under the second set of regulations, the penalty regulations, which are introduced under Clause 33. The penalty regulations would provide maximum penalty amounts under the civil penalty compliance regime provided for in Part 2. Drafts of both these statutory instruments were placed in the House of Lords Library on 22 January 2014.

The Bill provides for different parliamentary processes for these two sets of regulations, with the SSCRs to be made by the negative procedure under Clause 42(4) and the penalty regulations to be made by the affirmative procedure under Clause 33(7). I have previously discussed the recommendations of the Delegated Powers and Regulatory Reform Committee’s report on the Bill. The recommendations that the SSCRs should be subject to a first-time affirmative procedure and that the regulations made under Clause 14 should always be made by the affirmative procedure have been accepted, and the government amendments in this group make the necessary changes to the Bill.

In order to make the recommended changes to the parliamentary process, it was considered that simplifications could be made in order to allow all the regulations under Part 2 to be made in one statutory instrument rather than the two currently provided for, being the SSCRs and the penalty regulations. Amendment 19 therefore provides for provision about maximum penalties to be made under the SSCRs rather than in separate regulations. Amendments 20 to 22 make some simplifying amendments to accommodate the fact that there is now just one set of regulations, not two, and Amendment 23 provides for the new parliamentary process by which the unified SSCRs may be made. I will now address each of these amendments in turn.

Amendment 19 is a simplifying amendment. It removes the current provision for the maximum penalty amounts to be made via a separate statutory instrument—the penalty regulations—and instead provides for this to be done in the SSCRs as with all other provisions for regulations under Part 2. There is no change to the scope of provision that will be made under Part 2 as a result of this amendment, but using a single statutory instrument for all regulations under Part 2 allows for simpler provision for the parliamentary process to be used for that one statutory instrument.

Amendment 20 follows on from Amendment 19. Clause 33(6) currently provides for the penalty regulations, as a separate statutory instrument from the SSCRs, to vary the maximum penalty amounts for two purposes: first, for “different purposes” and, secondly, specifically by reference to the value of contracts. As a result of Amendment 19, the maximum penalty values will now be included in the SSCRs, while Clause 42(2) already provides for the SSCRs to make different provision for different purposes, which is a standard provision for regulations. Therefore the part of the current subsection (6) providing for different provision for different purposes is no longer required. This amendment replaces the current subsection (6) to provide only that different provision for the maximum penalty amounts may be made by reference to the value of contracts.

Amendment 21 deletes Clause 33(7), which dealt with the parliamentary process for the penalty regulations. It is no longer required because the provisions for maximum penalty amounts will now be in the SSCRs rather than in a separate statutory instrument. So this will now be covered by the parliamentary process for the SSCRs under Amendment 23.

Amendment 22 simplifies Clause 39, which provides for the review of Part 2 and the regulations made under it by the SSRO and the Secretary of State. As there will now be only one statutory instrument, the SSCRs, Clause 39(1) can be simplified to refer only to the review of the SSCRs, rather than the more general “regulations under this Part”.

The first four amendments of the group that I have now outlined make simplifying provisions in order to make all regulations under Part 2 via one statutory instrument, the SSCRs. Amendment 23 addresses two of the recommendations of the Delegated Powers and Regulatory Reform Committee relating to the parliamentary process under which the SSCRs should be made.

To begin with, it removes the current Clause 42(4), which provides that the SSCRs should be subject to the negative procedure, and replaces it by a provision reflecting those recommendations on the parliamentary process for the SSCRs: first, that they should be affirmative the first time that they are made; secondly, that any changes to the regulations related to Clause 14 should always be affirmative, as this governs which contracts will be subject to Part 2 and thus sets the scope of Part 2; and thirdly, that the affirmative procedure will also apply for any changes to regulations made under Clause 33, which relates to maximum penalty amounts and was previously to be contained in the penalty regulations. These were always to be subject to the affirmative procedure, so there is no change to the procedure as a result of this amendment. Finally, the SSCRs will follow the negative procedure for all cases other than those just outlined.

[Lord Roper]

My Lords, I welcome the Government’s amendments to these various clauses. They are a very full response to the report of our Delegated Powers and Regulatory Reform Committee of last December, which was responded to by the noble Lord, Lord Astor, in his letter to the committee published earlier this year. It seems that in these amendments the Government have taken fully the points that were made by the report. We are very well served by that committee, which ensures that there is the technical scrutiny to ensure that parliamentary control is maintained when there are questions of delegated powers. I feel that the Government have responded fully to the proposals of the committee. I am not sure whether it has yet had a chance to respond to the letter of the noble Lord, Lord Astor, or if there are any further points that we may need to come back to on Report, but I understand that it is generally satisfied with these amendments.

[Lord Tunnicliffe]

My Lords, at this point I have no objection to the government amendments, but that may be partly because I do not understand them. I shall find them easier to read when the Bill is reprinted for the Report stage but, as I say, I have no comment or objection at the moment.

I may be about to contradict myself when speaking to Amendments 22A and 23B. Amendment 22A is prompted by the industry, which has argued that the regulations arising as a result of the review should be made and updated in an open and transparent manner. It argues that an industry-wide consultation should be undertaken, the Secretary of State should have regard to that consultation and the regulations should be laid before Parliament. Amendment 23B argues essentially that the penalties regulations should be passed by the affirmative procedure on every occasion. These are penalties which could have dramatic effects.

I think that this is the last time I will speak, so I should like to congratulate the Minister on her marathon performance. I recall from when I occupied her place that it can seem a bit futile, but I know that what she has read into the record will be held to be of great value by both parliamentarians and those outside. I thank her and her officials for their efforts, and I look forward to reading with great care the products of our discussions. I also look forward to her letters.