Defence and Security Public Contracts (Amendment) (EU Exit) Regulations 2019

Lord Tunnicliffe Excerpts

Monday 4th February 2019 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I thank the noble Lord for introducing this statutory instrument. On the other hand, that is not really true: the facts of life are that I would rather not spend my weekend studying SIs for a scenario that is deeply absurd and the Government should have ruled out many months ago. It is, however, forced upon us.

Initially, I tried to read the Explanatory Memorandum while applying the test that I have been using so far—that there is no new policy except what is necessary to smooth the transition. That is essentially the test of the withdrawal Act. He has already said, however, that this SI goes beyond what is allowed in the withdrawal Act. I noticed that the SI also prays in aid the infamous—as I would call it—European Communities Act 1972, which must have the grandest powers of any piece of primary legislation. Since, therefore, this is quite important—that the Government are seeking to mix the two—I would be grateful if he could give a little more detail on where the 1972 Act has been used and where he is praying in aid the 2018 withdrawal Act.

I found the Explanatory Memorandum difficult to understand because it requires considerable previous knowledge. I can find only one area of concern. In general, the references to the requirement for a new organisation—for new parts of government to take over what is happening in the EU—all seem to make sense.

Essentially, I think the Minister has said that this SI leaves the situation unchanged. Does that mean that the requirement to put defence procurement up for both domestic and international tender is unchanged, except where derogated under provisions similar to Article 346, which I assume is written into the regulations? Does the derogation for national security reasons remain unchanged? Has it been decided that it should not be enhanced, as many of us would argue it should, to include wider, more long-term considerations, such as the preservation of UK sovereign capability by favouring UK firms in some circumstances? This measure seems to create a situation where the rest of the world can bid for UK contracts except where derogated. Does that mean that UK firms will be able to bid for foreign contracts, particularly opportunities in the EEA?

Finally, can the Minister indicate what will happen to these regulations in the event of a deal? Do they die in total or in parts? How will the deaths be managed?

[Earl Howe]

My Lords, once again I thank the noble Lords who have contributed to this debate for their questions, which I will do my best to answer. The noble Baroness, Lady Smith, and the noble Lord, Lord Tunnicliffe, both asked a similar question about the coming into force of these regulations and the circumstances in which they might not come into force. These amending regulations apply only in a no-deal scenario, other than the changes being made under Section 2(2) of the European Communities Act.

The noble Baroness, Lady Smith, was slightly unclear as to how we could avail ourselves of powers under that Act if we are not a member of the community. The answer is that we are still a member of the European Union and we can avail ourselves of the powers under the 1972 Act until such time as we cease to be members. The very minor adjustments we are making will come into force regardless of whether there is a deal or no deal. If the withdrawal agreement enters into force, the UK, with certain specific caveats, will be treated as an EU member state for the duration of the implementation period. Therefore, the current DSPCRs will continue to apply for that period, albeit with the updates and corrections made in Regulation 2.

The noble Baroness and the noble Lord asked about those changes. They are very minor. They are, in the main, changes required to resolve outdated references and to correct an omission arising from an amendment to the European Economic Area agreement. There is an amendment to the definition of “member state” to add Norway and Iceland, ensuring that economic operators from those two EEA states are covered. Again, that amendment is required regardless of whether the exit-related changes come into force. There are various other minor changes that I can read out, but I think it would be tedious if I were to do so.

The noble Baroness and the noble Lord, Lord Adonis, asked about the effect of the coming into force of these regulations on UK companies and what the benefits to UK industry are likely to be. The main benefit for both UK and Gibraltarian suppliers will be stability and continuity of working regulations, which are well established, understood and practiced. Importantly, UK and Gibraltarian suppliers will continue to enjoy legal rights to participate in UK defence and security procurements. Other non-UK economic operators, save for those in Gibraltar, will not have these rights under the amending regulations. I make it clear that that is not to say that only UK or Gibraltarian suppliers can bid for defence and security procurements. As noble Lords will know, the UK has a long-standing practice of allowing overseas suppliers to participate in defence and security procurements where there is no need for restrictions on who can bid in some way—for example, on national security grounds.

The noble Lord, Lord Tunnicliffe, asked whether UK companies would be disadvantaged regarding their access to the EU market. As a matter of EU law, EU member states will no longer be legally obliged to open their defence and security procurements to UK suppliers, as the EU defence and security directive will no longer apply to the UK after exit day. However, it has to be said that our UK suppliers are recognised as world class. They offer extraordinary experience and expertise in defence. Individual EU member states therefore may choose to give UK suppliers access to their competitions to maximise the effectiveness of their procurements in the same way as the UK does. There is a strong case in terms not only of value for money but of other considerations, such as interoperability and cutting-edge capability.

[Lord Tunnicliffe]

I feel that I have lost my place. Is the Minister saying that non-derogated invitations to tender will be restricted to the UK suppliers and Gibraltar, or will they be available to worldwide competition, with certain exceptions?

[Earl Howe]

It will depend on the procurement. If it is determined that the procurement rate relates to an issue necessitating the protection of UK sovereign capability, as in the case of the construction of warships, we would restrict the tendering process to UK-based suppliers. However, the generality of defence procurement is opened up to the widest market possible, although, as was pointed out, we make clear in certain procurements that we will not entertain bids from certain countries. Each procurement has its operational basis made clear at the outset.

The noble Baroness, Lady Smith, asked whether we will give state aid to suppliers. We have no intention of providing state aid to UK suppliers, which is incompatible with our state aid regime. I am sure she will not be surprised to hear that. Having said that, it is important to understand that there are ways we can alert our home-based industry to forthcoming procurements to enable them to prepare their bids in good time and understand our needs. That process is already under way; we are clear that the entire procurement process needs to be smoother than it perhaps has been. That is not the same as state aid, however.

The noble Baroness also asked whether the Government have modelled the impact of the change on UK defence exports. As I said, defence suppliers will lose their legal rights to participate in procurement in the EU 27, but the quality of our companies should ensure that many EU member states will still wish to entertain bids from our defence industry. As the noble Baroness knows, the UK defence industry participates in co-operative defence projects, such as Eurofighter; that will not change either.

[Lord Tunnicliffe]

I am sorry to ask the same question over and again, but it is important: putting the derogated areas covered presently by Article 346 to one side, do the regulations—noble Lords must realise that I cannot read them; it took all my time to read the Explanatory Memorandum and try to understand it—require the UK to put non-derogated opportunities to international tender, or is that a matter for the United Kingdom Government’s discretion on a project-by-project basis?

[Earl Howe]

It is important to understand that competition remains at the heart of our approach to defence procurement. Currently, we routinely allow bids from suppliers outside the EU, although the current legislation provides a legal right of access only for suppliers based in EU member states. Where we restrict who can bid in some way—for example, on national security grounds, as I have mentioned—we would make that clear at the outset in the advert or in any pre-procurement documentation.

That position will not change after exit day. Suppliers in the EU and elsewhere will still be free to bid for procurements where no limitations are specified. What is changing is that bidders from the remaining EU member states will not have a legal right to bid for defence contracts; this is the same position as for suppliers currently based outside the EU. I hope that answers the noble Lord’s question.

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[Earl Howe]

For UK Government defence procurements, the process from the point of view of an EU supplier will be no different. What it will experience is the need to bear in mind two separate portals or bidding channels; one is the UK e-notification system, which I mentioned earlier, and the other is OJEU. It will need to keep an eye on both if it wishes to participate in the Europe-wide market; in using that phrase, I include the UK as still being a European country, even if not a member of the EU.

[Lord Tunnicliffe]

The noble Earl says there will be no changes. I understand that at the moment, in non-derogated areas, EU suppliers have a right to bid and we have an obligation to take their bids seriously. I think that under the new situation they do not have this right and that whether they are allowed to bid will be a matter of policy. That policy could change year by year or Government by Government.

[Earl Howe]

That is technically right. It is our policy to maintain access for EU member states—and indeed, non-EU states—in many, if not most, instances of procurement. A good example might be the fleet solid support ships. We invited tenders from all over the world to build those ships and that should provide the best value for money. We all hope that UK suppliers will feel confident in bidding for that contract, but we wish to benefit the taxpayer as well as the Royal Navy and the process will be an open one.

To answer one point which the noble Lord, Lord Adonis, alluded to, there will of course be opportunities to reform the defence procurement rules after we leave the EU. The current rules are generally seen as out of date, compared to the PCR 2015. We have the opportunity to take a fresh look at what is needed for defence procurement—