Defence Reform Bill

Tuesday 10th December 2013 Lords Chamber

Second Reading

15:23

Moved by

[Lord Astor of Hever]

That the Bill be read a second time.

[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever) (Con)]

My Lords, our Armed Forces do an exceptional job and I am sure that all of us in this House will wish to pay tribute to their dedication and the sacrifices they make to keep this country safe. But the Armed Forces can defend the country and protect our national interests only if we provide them with the manpower, equipment and support that they need. In particular, making sure that our Armed Forces have the right equipment, delivered on time and to the right specification, is essential if we are to maintain our capabilities into the future. Making full use of the expertise and skills of our Reserve Forces is also crucial if we are to meet the security challenges that we face over the next decade and beyond.

Let me start this debate by addressing the issue of the reform of the Defence Equipment and Support organisation, which is covered in Part 1 of the Bill. My right honourable friend the Secretary of State for Defence made a Statement earlier today in the other place, and I would like to set out what that said.

The 2010 strategic defence and security review set out the Government’s vision of an agile Armed Forces designed to face the challenges of the 21st century. Central to delivering and sustaining that vision is the ability to procure and support the equipment that the Armed Forces need. There is widespread acceptance that the present defence acquisition process is not good enough. While there have been notable successes, there have also been many examples of poor performance and unsatisfactory outcomes for the Armed Forces and the taxpayer.

The significant reforms that we have already instituted to DE&S are only a start. A more radical reform of DE&S is necessary if it is to sustain the skills that it requires to support our Armed Forces effectively. That is why we developed the matériel strategy programme, which is designed to remove the obstacles to bringing in critical skills by exploring alternative models for DE&S. It was announced in April that the Government had concluded that a Government-owned, contractor-operated model, a GOCO, might well be best placed to deliver the changes required in DE&S, but that we needed, through a competition, to test the market’s appetite for that model and confirm that it would deliver value for money.

In parallel, it was announced that we would work up a public sector comparator, exploring the maximum extent of flexibility that could be achieved within the public sector—a model that we have called “DE&S-plus”. The Government have maintained an open mind as to which option would prove overall to deliver the best balance of risk and potential reward once bids were received.

On 19 November my right honourable friend the Secretary of State informed the other place that we had reached the detailed proposals stage of the competition, with only one bid being received from the two consortia remaining in the process. That bid was from Materiel Acquisition Partners, a Bechtel-led consortium. The Government made clear that we would consider carefully how best to proceed in the light of this development. It has now been confirmed that we have decided not to continue the present competition.

The heart of our approach was to test the market’s appetite for delivering a GOCO along the lines that we had set out, using the competitive process to drive innovation and value. We have always recognised that there are risks inherent in the GOCO approach. With only one bidder remaining in the competition at this intermediate stage, a judgment has had to be made about whether the public sector comparator alone would generate sufficient competitive tension to ensure an effective outcome for the Armed Forces and value for money for the taxpayer. Although the remaining consortia presented us with a credible and detailed bid, we do not have a competitive process. It has therefore been concluded that the risks of proceeding with a single bidder are too high to be acceptable.

We believe that a GOCO remains the best potential future solution to the challenge of transforming DE&S, but that further work is necessary to develop DE&S financial control and management information systems to provide a more robust baseline from which to contract with a risk-taking GOCO partner. We are clear that the only realistic prospect of resolving the delivery challenges facing DE&S in an acceptable timescale is with the injection of a significant element of private sector support. It has therefore been decided to build on the DE&S-plus proposition, transforming DE&S further within the public sector, bringing in that private sector support and ensuring that it becomes “match-fit” as the public sector comparator for a future market-testing of the GOCO proposition.

To do this, we will recognise the unique nature and characteristics of DE&S as a commercially facing organisation by setting it up as a bespoke central government trading entity from April 2014. The new entity will be at arm’s length from the rest of the MoD, with a separate governance and oversight structure—a strong board under an independent chairman, and a chief executive who will be an accounting officer, accountable to Parliament for the performance of the organisation. This will deliver another of the recommendations from the noble Lord, Lord Levene. Crucially, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury, around how it recruits, rewards, retains and manages staff along more commercial lines to reflect its role in managing some of the most complex procurement activity in the world.

These changes will reinforce the relationship between the military command customers and DE&S, leading to a more business-like approach, allowing us to move earlier to a hard-charging regime and thus further addressing one of the weaknesses identified in the 2009 Gray report. They will allow DE&S to procure crucial private sector support through a series of contracts to deliver key changes to systems and processes and to support programme management while organic capabilities are built. They will permit the recruitment into DE&S of key commercial and technical staff at market rates and with minimum bureaucracy. Bernard Gray has agreed to become the first chief executive of the new trading entity, thus providing a vital thread of continuity to the continuing DE&S reform agenda from the original Gray report. Alongside the changes to DE&S, we will also continue with the reform of our wider acquisition system, which is focusing on making us a more intelligent customer—a key role for our military, alongside the important role it will continue to play within the DE&S.

These changes will drive significant incremental improvements in DE&S as well as delivering the mechanisms that will give the organisation a robust performance baseline. That will allow the MoD, at a future date, to retest the market’s appetite for continuing the DE&S evolution into a GOCO and its ability to deliver guaranteed value for money against a match-fit public sector comparator. On both counts, this course of action represents the best way forward for our Armed Forces and for the taxpayer.

Part 2 of the Bill sets out a statutory framework for defence contracts awarded in the absence of a competitive process. The White Paper on defence acquisition published in June this year included important changes to our single-source procurement regime. These changes follow the independent report on single-source procurement that was carried out by the noble Lord, Lord Currie of Marylebone, in 2011. Although competition is our preferred approach, the need to maintain critical national industrial capabilities or sovereign control of the intellectual property in equipment programmes sometimes requires us to place contracts without a competitive process. Single-source procurement typically accounts for about 45% of the total the MoD spends on defence equipment and support, or about £6 billion per year, and is likely to remain at those levels for the next decade or so.

Without competition, suppliers can price and perform without being constrained by the disciplines of the marketplace, putting value for money at risk. The absence of an alternative supplier also undermines our contractual negotiations because we have a duty to provide our Armed Forces with the equipment they need, and our suppliers know we cannot go elsewhere. These are serious shortcomings, and we need to address them with an approach to single-source procurement that ensures we get value for money, while still allowing our suppliers a fair and reasonable price, and where the safeguards we need are not regarded as voluntary and a matter for negotiation.

The MoD currently uses a framework for single-source procurement which has remained largely unchanged for the past 45 years. Under this system, which is voluntary, the profit contractors can earn is fixed and there are few incentives for them to reduce costs. The noble Lord, Lord Currie, recommended a new framework: one that is based on transparency, with much stronger supplier efficiency incentives, and which is underpinned by stronger governance arrangements. Based on his recommendations, and following extensive consultations with our major single-source suppliers, we have developed the framework provided for in Part 2.

The Reserve Forces make an essential contribution to delivering the nation’s security at home and overseas. They are an invaluable part of our Armed Forces, working alongside their regular counterparts to deliver military capability. On 3 July this year, we published a White Paper that set out a range of measures for revitalising the Reserve Forces, reversing the decline of the recent past, growing their numbers and investing an additional £1.8 billion over 10 years in their training and support. These measures include improved training and more opportunities for reservists to train overseas, enabling them to undertake the same range of military tasks as regulars, including overseas capacity building and responding to crises at home. The tax-free annual training bounty will be developed to recognise commitment, encourage retention and reward the appropriate level of capability. Reservists will also have improved access to healthcare and better access to welfare support. This will provide reservists with a challenging and rewarding experience. The Bill before us today includes the legislative changes needed to help modernise and make greater use of our reserves and to ensure that both they and their employers are treated fairly.

Part 3 of the Bill makes changes to the Reserve Forces. First, it extends the current powers to call out members of the Reserve Forces. This will allow reservists to be called out for any purpose for which regular forces may be used. Secondly, it allows the Secretary of State, by regulations, to provide for the making of payments to employers to incentivise the recruitment and retention of reservists. Thirdly, it provides improved employment protection for reservists by allowing a right of access, without a qualifying employment period, to the employment tribunal for unfair dismissal where dismissal relates to their reserve service. In addition, the Territorial Army will be renamed the “Army Reserve” and the Army’s ex-regular reserve force will be renamed the “Regular Reserve”.

The support of employers is crucial to delivering the future Reserve Forces and we seek to strengthen the Ministry of Defence’s relationships with employers. The White Paper set out how we will do this by making liability for call-up more predictable, making it easier for employers to claim the financial assistance that is already available and introducing a new employer recognition scheme building on the corporate covenant to ensure that reservist employers receive the recognition that they deserve. We acknowledge that reserve service can have a particular impact on SMEs. We understand these challenges and believe that our measures, particularly those around providing employers with greater predictability, greater transparency and financial support, will be especially important for SMEs, which is why we will increase financial support for small and medium-sized enterprises by introducing a financial award of up to £500 a month per reservist when any of their reservist employees are mobilised.

The House will be aware that on Report in the other place, my right honourable friend the Secretary of State signalled his intention to accept in principle a change to the Bill to provide for some form of annual external scrutiny and reporting on the arrangements for the Reserve Forces. This is an important change that will ensure that Parliament has access to independent advice about the Reserve Forces and the regular opportunity to review these matters. Given this, the Government intend to bring forward a suitable amendment to the Bill in Committee.

I very much look forward to our debate this afternoon. I believe this Bill strikes the right balance between ensuring we deliver the military capabilities that our Armed Forces need and making sure that value for money is provided to the taxpayer. I therefore commend the Bill to the House.

I beg to move that the Bill be committed—

[A noble Lord]

Nice try.

15:39

[Lord Rosser (Lab)]

We nearly had an entire afternoon and evening disappear.

We wish to associate ourselves with the comments made by the Minister on the commitment and dedication of our Armed Forces.

We are in a remarkable situation today, in that we have the Second Reading of a Bill that provides, among other things, for major changes in procurement and support of defence equipment, yet just over two hours or so before this debate started the Secretary of State was making a Statement in the other place on defence procurement that significantly altered the Government’s position. That is a sign not of bad luck but of bad judgment, and an indication of the extent to which procurement policy now appears to be being made on the hoof. However, despite the Statement by the Secretary of State earlier this afternoon, much of which the Minister has reiterated, this Bill still has three main parts, including Part 1 on defence procurement.

Part 1 sets out the arrangements for changing Defence Equipment and Support and making it into a government-owned, contractor-operated organisation. Part 2 establishes a statutory framework for the governance of Ministry of Defence single-source contracts—that is, contracts that are not subject to a legal obligation to be advertised and competed for. Part 3 makes several amendments to the regulations governing the Reserve Forces in the light of the enhanced role our reserves will play in future.

The Government have been considering two options for the future operating model for Defence Equipment and Support; namely, the GOCO entity or the public sector comparator under which DE&S would remain entirely within the public sector. Legislation is required to pursue the former option and, even though it had not been the Government’s intention to make a final decision on whether to pursue the GOCO option until next summer, the relevant enabling legislation was included as part of this Bill. The Secretary of State has now announced that he has decided not to continue the present commercial competition, which was no longer a competition because there was only one bidder. Instead, the Government have decided to do what the Secretary of State describes as building on the DE&S-plus proposal. But his last-minute proposal is, as yet, only in outline.

In respect of our Reserve Forces, the Bill contains four key measures. These are renaming the Territorial Army, expanding the powers to call out the Reserve Forces, introducing new financial incentives for the employers of reservists, and exempting reservists from the statutory two-year qualifying period required to bring an unfair dismissal case to an employment tribunal. These measures, which require legislation, are part of the Government’s policy for reconfiguration of the Army into two distinct elements, a high readiness reaction force and an adaptable force. This change is associated with the reduction in the size of the Regular Army by 20,000 personnel by 2020, and also involves a greater integration of the Territorial Army into the Army structure with an expansion in the roles that the reserves will undertake and an increase, by 2018, in the number of trained reservists to 30,000.

Single-source contracting accounts for approximately 45% of all Ministry of Defence contracts and equates to £6 billion per annum. At present, such contracts are placed under a non-legally binding framework, which can be amended only on the basis of consensus. A review of the current arrangements has been undertaken, which has led to the proposals in Part 2 of this Bill for a new statutory framework for single-source contracts. There is also provision for a civil penalty regime to ensure compliance, and the creation of a Single Source Regulations Office, which is intended to ensure the regime is kept up to date, monitor the application of the regulations, and provide binding determinations in the event of disputes between the Ministry of Defence and single-source suppliers in its role as an independent expert in single-source procurement.

On the face of it, one would not now expect this Bill to be the subject of great controversy, and particularly so in the light of the Secretary of State’s announcement earlier today. We also hold the view that defence procurement and support is in need of reform. Any difference of view will come over how that reform should now be achieved in the light of recent developments. We share the view, recently expressed by the noble Lord, Lord Levene of Portsoken, that the review of materiel strategy, which has been going on for some time, needs to be brought to a conclusion in view of the uncertainty for the future it creates and the amount of time and effort that is being expended on it, and that the quickest and most straightforward solution is via DE&S-plus, subject to that embracing appropriate employment and pay freedoms.

That solution is also not as far removed as the GOCO option from the proposal we made for reform of defence procurement. However, it appears that the Government intend to leave Part 1 in the Bill, which, as it stands, would provide the necessary legislative powers to set up a GOCO, with little further ado, at a later date. Doing that will simply perpetuate the uncertainty over the future arrangements for reform of defence procurement, which will be of benefit to nobody, least of all our Armed Forces. It means that the change could be made to a GOCO without proper scrutiny, and leaves the suspicion that the announcement today by the Secretary of State represents little more, as far as the Government are concerned, than a stop-gap solution.

The Secretary of State’s Statement earlier today said that the change in government policy on procurement that he was announcing would allow the Ministry of Defence, “at a future date”, to retest the market’s appetite for a GOCO—a statement that will simply continue the uncertainty to which the noble Lord, Lord Levene, referred in his recent report. Perhaps the Minister could make the situation worse, or, alternatively, improve the situation in relation to future uncertainty for the proposed new DE&S organisation and its staff, by telling us what the phrase “at a future date” is meant to mean. Is it intended to mean not before the next general election, or is it a longer timescale than that?

It was the day before Report stage in the House of Commons last month that the Government announced that one of the two remaining consortia bidding for the government-owned, contractor-operated organisation had withdrawn from the competition, and that work was under way to determine whether it was in the public interest for the Ministry of Defence to proceed with only one commercial bidder and the public sector comparator, DE&S-plus. It had already been made clear before then that the Government’s strong preference was for the GOCO, and that they would be testing this proposition through a commercial competition and against that public sector comparator. The impression was certainly given, and remains after today’s announcement, that the DE&S option was in essence being undertaken to provide a benchmark to justify the GOCO rather than it ever being the option the Government would take if they could avoid it.

Many concerns have been raised in a number of quarters about the proposal to transfer the whole of defence acquisition and support to a private contractor. Those concerns have related to potential conflicts of interest, the length of the contract, how ministerial and parliamentary oversight will be provided, what financial risks would actually transfer to the GOCO, how a GOCO would make money while also saving the Ministry of Defence money, what the implications would be for our international partners and what their reaction would be to the change.

A further key question, though, is why it has taken three weeks from the day before Report stage in the House of Commons to today for the Government to decide that their declared key objective for ensuring a rigorous evaluation process of the GOCO option—namely, a commercial competition—was no longer valid or achievable when the competition was somewhat diminished in rigour once the number of competitors had been reduced to one. The suspicion must be that the Government were in reality so wedded to the GOCO option as their vehicle for achieving the reform of defence procurement—a reform that we also agree is needed—that they were prepared to contemplate proceeding without a commercial competition; in other words, a form of single-source contract. That is a further reason why there are question marks over why Part 1 remains in the Bill despite today’s announcement, and a feeling that if the Government were prepared to contemplate proceeding with the GOCO option without any commercial competition, that is what they may be tempted to do at a later date if Part 1 remains in the Bill.

The position should be that if a Government decide that they want to achieve reform of defence procurement at some stage in the future through the GOCO route, they should be required to do so through means of a parliamentary Bill at the time to justify their stance and their new proposal, and not be able to do so without proper scrutiny using a parliamentary Bill that had been passed some time previously and during the course of which, before it had even been discussed in this House, the Government announced they no longer intended to proceed with the now non-existent competition and its single proposal or bid. We will certainly be pursuing the question of why Part 1 remains in this Bill, since no satisfactory explanation has been given as to why it should remain, rather than be brought back for full scrutiny in a further Bill if a Government decided to go down the GOCO route at a future date. I should like to ask the Minister how much public money has been spent on this competition exercise so far, and whether it is anticipated that there will be claims from any of the consortia—not least the one that was still left standing, which must also have invested a considerable amount of time and effort in preparing and submitting a proposal that the Government have said ran to more than 1,200 pages.

The other area where the Government have run up against problems is in relation to the increase in our Reserve Forces. I want to make it clear that we have previously expressed our support for the expansion of our Reserve Forces, and that remains our position. However, there needs to be transparency and openness about the progress being made on applications, recruitment and trained strength of our Reserve Forces. The UK Statistics Authority has said that some aspects of the Government’s figures are not robust enough. The Secretary of State has said that he will publish before the end of this year the targets to which the Government are working. On 20 November in the House of Commons the Secretary of State said that he was minded to accept in principle—as the Minister has said—a new clause that provided for an annual report by an external scrutiny group of Reserve Forces and cadets associations, and indicated that he would introduce an amendment in your Lordships’ House that reflected that new clause. We await it to see whether the new clause will provide for the transparency and openness needed in the Government’s plans for our Reserve Forces.

One aspect on which we have still not received an answer is over the apparent change of policy from that announced by the previous Secretary of State that the reduction in the number of regulars would not take place until we had seen the necessary improvements in training, equipping and numbers in the reserves. Is that still the Government’s policy, and if it has changed—and there may well be good reasons for a change—what are those reasons and what is the policy now? Can the Minister say whether it is the Government’s view that it would be consistent with the SDSR to proceed with a further tranche of redundancies for our Regular Forces irrespective of the progress made in the recruitment of additional Reserve Forces? If to do so is judged to be inconsistent with the SDSR, what part of the SDSR planning assumptions would be changed to keep the contraction in our forces in line with the SDSR?

In the light of the Secretary of State’s statement that he will publish before the end of this year the targets on reserves to which the Government are working, can the Minister say whether those targets will indicate not just overall numbers but the targets for the different types of skills and roles for which the additional members of our Reserve Forces are being recruited? Will any assessment be given of the overall quality of personnel being recruited?

Perhaps the Minister can also give us the latest update on progress on recruitment to our reserves. Is the recruitment being done by Capita or have others been called in to either supplement what it is doing on recruitment of reserves, take over from Capita, or advise and monitor it on what it is doing. As has been said, the attitude of employers is crucial. Employers in the fields of, for example, cybersecurity and the medical world may well be more enthusiastic than others in seeing their staff join the reserves as the knowledge and experience they will gain in those fields as members of the Reserve Forces may well be of direct benefit to their employers. On the other side of the coin, if such staff were called up due to a major military operation, it might just be the time when their companies or organisations also needed them most.

There will be much to discuss in Committee: why the need for Part 1 of the Bill to remain; how the just announced to be transformed DE&S-plus organisation within the public sector will function and operate; and why the Government are still willing to perpetuate uncertainty over future defence procurement in their apparent determination to try to introduce a GOCO at a future unspecified date. Part 2 of the Bill on single-source contracts will need close consideration. We support the concept and the intentions, but this part of the Bill received only limited consideration in the other place and, once again, this House will have to do what the other place was unable to do. The proposals on our Reserve Forces will, I am sure, be the subject of much detailed consideration and debate, and we wait with interest to see the amendment that the Secretary of State told the other place he would bring forward in this House.

Government policy on defence procurement is in a mess and now bears all the hallmarks of being made up as we go along—not least because the prospect that there might be only one commercial bidder apparently never occurred to the Government. What is needed now is a period of stability and certainty on defence procurement and, in the light of the breakdown of the commercial competition for a GOCO—for the new, just announced, but as yet unclear, variation of a DE&S-plus organisation in the public sector—to be given every chance and every encouragement to deliver the reform in defence procurement and support which nearly everyone believes is needed and necessary.

15:55

[Lord Palmer of Childs Hill (LD)]

My Lords, from these Benches we wish to associate ourselves with the tributes to our Armed Forces. The problem with this debate is that it is rolled up with a Statement from the other House. If we had had the Statement and a debate on it, we would have been able to concentrate on the GOCO arrangements, but we have a Bill with three definite parts, and I am delighted to see that both my noble friend the Minister and the noble Lord, Lord Rosser, have covered the whole Bill, not just the most contentious part of it.

My noble friend said that procurement was not good enough. In fact, I am afraid that procurement in the Ministry of Defence is not fit for purpose. There is a failure in the procurement process. The noble Lord, Lord Rosser, said that it should be brought to a speedy conclusion. Well, the Labour Government ignored it for 13 years, and they ignored it because it was a problem. It still is a problem. It was a problem then and it is a problem now. The coalition Government attempted to tackle it with innovative solutions that have not in fact worked out. Attempts were made to construct a system that worked, and we have concluded that the main thrust of that system will not work.

Mr Bernard Gray told us that, as director, he would solve the problem. I wonder whether the House is assured of the future when the Minister talks about continuity by having Mr Bernard Gray as the chief accounting official and chief executive of the DE&S-plus. Forgive me, but this is the man who told us that he would sort it all out and get it right. I just wonder, with due deference, whether we would not do better to have a completely fresh look at this and let Mr Bernard Gray reorganise something else. I hope that our Government will look at that again, because I certainly do not think that that would instil a feeling of confidence in the DE&S-plus system so ably enumerated by the Minister.

The problem in this area of the MoD is dealing with the major contractors. Our staff in the MoD are being outclassed by the major contractors, and by their lawyers, engineers and the like. My noble friend has indicated the efforts that will be made to bring our team up to a better standard, but the history of this has not been good. The other problem is making the wrong decisions about what is required, which was the problem for the 13 years of the previous Government and, sadly, to some degree the problem for this coalition Government.

The noble Lord, Lord Rosser, rightly spoke about costs to the bidders. Judging by the numerous pages of its bid, Bechtel clearly spent a lot of time on it, as did the other two unsuccessful bidders. I understand from the Minister’s comments that they will be involved in some way in the new DE&S-plus, but there must be some worries about that. The noble Lord talked about Part 1 not remaining in the Bill, but my plea is that it should stay in the Bill, with the proviso that we are not implementing part of the provisions that were made available on the GOCO arrangements in the Bill. When the Minister replies, I hope that he will explain what provisions there are to make sure that this will not go through on the nod at some future date but will be brought back to this House—because, if it happens, it will be a major effort.

I shall concentrate in the rest of my comments on the most unexciting part of the Bill—Part 2, on single-source contracts—but we need to ensure that the Bill does not produce unintended consequences for the UK’s attractiveness as a place to invest. The Bill appears to allow the MoD to challenge the price of a contract at any point up to two years after the end of the contract. It will reduce predictability over contract price, with possible adverse consequences for boardroom confidence to invest, and the international perception of the UK as a good place to do business. Is the unintended end point of the proposed reform to be that suppliers refer their own contracts to the Single Source Regulations Office at the start of the contract to gain greater confidence over the price and the profit? At the moment, the whole contract can be changed at any point up to two years after it has finished.

The Bill states that the SSRO may make provisions that limit the number of times and the period after a contract ends when the MoD may challenge the price. It may also specify the grounds for a challenge. This is a first step, but the industry will need to have greater confidence in a firmer commitment. As we debate the Bill during its passage through the House, we need in this section a provision that the contractor should not be able to increase its price, and that the MoD should not be able to decrease the price: they will make a contract and, provided the product is up to standard, that is what it should be.

On the universal application of the regulations in Part 2, which allows the Secretary of State to exempt any contract from the new regulations, there are times when exemptions will be necessary, but defining the criteria for awarding exemptions would improve certainty for suppliers—and they will need that certainty. The possible exemption of contracts placed with overseas suppliers may place the UK suppliers at a competitive disadvantage globally. The stringent compliance and monitoring regime will place an additional cost burden on UK suppliers and their supply chains. Will the Minister address the issue of the possible creation of complex contracting arrangements, in which contracts are placed offshore in order to avoid the compliance and monitoring regime? The MoD agrees that there will be circumstances in which an exemption will be required, but these will not be defined in the regulations. That seems to be a weakness.

As to independence and impartiality, the Bill appears to allow the customer—the MoD—a significant degree of control over the regulator, the SSRO. The Secretary of State appoints the chairman and board and has a broad power to repeal the regulations and even to abolish the SSRO. Lack of industry confidence in the SSRO as an independent arbiter between the MoD and the industry is a risk. The industry would like to see further steps taken to bolster the independence of the SSRO, as it will fund 50% of the costs of that organisation and yet has no control over the potential cost growth of that body.

The MoD recognises the problem—and that may be part of the solution. The SSRO is independent, as it will be allowed to decide its processes outside those defined in the Bill. An industry representative will sit on the selection panel for the chair of the SSRO. This part of the Bill certainly has more meat on it, and I hope that in Committee we will able develop it further.

I turn briefly to the question of reserves, in the hope that my noble friends Lady Garden and Lady Doocey will take it up in more detail. I will talk about the deployment and appeals processes, and what the Bill will do. Its provisions will place a greater burden on the employers of reservists by extending the circumstances in which reservists may be deployed. This will clearly have a business impact, particularly on SMEs employing reservists with unique skill sets. It is unclear to me—and it is not laid out in the Bill—how SMEs will be helped to replace such specifically talented employees.

The MoD intends to expand its cyber reserve. This may transfer expertise from the private sector to the public sector, as opposed to expanding overall expertise. Greater clarity is required on what steps will be taken to support the employers of reservists in these circumstances. The Ministry of Defence’s position appears to be what is set out in Section 78 of the Reserve Forces Act 1996, which allows the Secretary of State to enable a person liable to be called up to apply for a deferral or exemption. Again, when we deal in detail with the question of the reserves, we will need to make sure that employers feel confident that this is something that they can live with and that will not harm their businesses.

16:06

[Lord Levene of Portsoken (CB)]

My Lords, I welcome this opportunity to comment on the progress of defence reform in the Ministry of Defence. When the former Defence Secretary, Dr Liam Fox, took office, he asked me to chair a steering group to monitor the progress of that reform. Your Lordships may recall that at the time a very large shortfall had been revealed in the funding of the forward programme of the MoD, and so drastic action had to be taken. That group produced a report, which was published in June 2011, containing a large number of recommendations, several of which required substantial change in the working practices of both the department and the military. After the report was published and the present Defence Secretary, Philip Hammond, took office, he asked me to continue to monitor progress on those recommendations. The first such report was published in December 2012 and I undertook to produce a further update before the end of this year.

Your Lordships will be able to see from that second annual report, which was published last month, the detail of what had been concluded, which was that further significant progress had been made on putting into effect the earlier recommendations. These changes, which were welcomed within the department at all levels, both military and civilian, have become the norm for behaviour in the department and, in my opinion, are being carried out with real enthusiasm. I take this opportunity to congratulate those who have worked and who continue to work in this sphere on what they have achieved.

Today, the Defence Secretary has detailed his conclusions as to the way forward for the Defence Equipment and Support organisation, where an evaluation has been under way for some time as to whether that operation should become a GOCO, a government-owned contractor-operated organisation. This has generated considerable discussion. As someone who was responsible for managing defence procurement for six years, I have to say that I have never believed that a GOCO is the right solution.

I have no prejudice against GOCOs. At the time that I was working for Michael Heseltine, the then Defence Secretary—now, the noble Lord, Lord Heseltine—I introduced the first GOCOs into the Ministry of Defence to take on responsibility for the management of the Royal Navy dockyards at Rosyth and Devonport. These proved to be very successful and were then transformed from GOCOs into facilities managed totally within the private sector.

Defence procurement, however, is not an industrial operation. When procurement is undertaken on behalf of Her Majesty’s Government for the Armed Forces, there are many other factors which need careful attention. These factors include the need to bear in mind the likely effects on the wider economy, the need to consider the strategic implications of a procurement decision, and the need to take into account international implications. It is in the nature of a commercial bidder from the private sector that they will be just that, and therefore the need to demonstrate total impartiality is an extremely difficult task to manage.

I underline my concern at the way that some politicians continue to run down the abilities of civil servants throughout Whitehall. It has become far too common recently for both the military and civilian staff within the MoD who manage those procurement programmes to be depicted as poorly suited to run complex, large commercial contracts because they are insufficiently experienced in that domain. I can reference numerous instances where both civil servants and military officers have transferred into the private sector, where they are in great demand and prove to be a major asset. I should like to cite just one example for your Lordships.

After I left the Ministry of Defence, I was asked to take over as chairman of the Docklands Light Railway, the performance of which was woeful. I asked for permission to recruit two or three military officers and civil servants to sort out what had become an ever-growing shambles. They seized the problem and converted the railway into one of the most efficient operations in Europe. And whom did I select as the chief executive for this task? It was none other than a very modern major-general, who became the star of the show. Therefore, can we perhaps celebrate and exploit the talents of these remarkable people, and stop running them down?

Your Lordships may well ask why, if that is the case, there has been a problem in managing defence procurement successfully. In my view, the answer is straightforward. The one element of understanding which is in very short supply in the organisation is very top-level commercial experience. However, in order to acquire this, I do not believe it is necessary to create the type of revolution which the handing over of this function to a private sector business would undoubtedly create. I believe that once real commercial experience is made available to the department—and the number of people required to achieve that is no more than a handful—existing staff within the department will respond well and successfully to that leadership.

Those of your Lordships who may doubt that should look back to what has previously been achieved. I should like to refer to a report of the Public Accounts Committee on the Ministry of Defence major projects statement:

“The department has undertaken a review of a total of 37 projects, each valued in excess of £100 million started in the last five years ... the cost to date was just under one % less than the department estimated when the orders were first placed. And ... 28 of the 37 projects were expected to be completed on time, one was ahead of schedule and of the rest, only three had delays that were expected to exceed one year, the delays would not result in additional costs falling on the department”.

That report was dated October 1991.

For all those reasons, the Defence Secretary’s decision to drop the plan for a GOCO in favour of what has been termed DE&S-plus is undoubtedly the right one. I should be grateful if the Minister, when he responds to the debate, could explain the difference between DE&S as we have it today, DE&S-plus, its predecessor but two the Defence Procurement Agency, a GOCO and, if I may use the term, DE&S-plus-plus. That would help the House to understand this matter better. The essential thing, in my view, is to enable the Defence Secretary to employ the small number of people needed on competitive, commercial terms, thus removing the barrier that has stood in the way for so long.

The Statement speaks of the new organisation having a strong board and an independent chairman and chief executive, who, as I had strongly recommended, will be an accounting officer. Bearing in mind the Government’s total commitment to competition, where is the competition for the key post—that of the chief executive? We are told that the new chief executive has agreed to take up the post. Can we be sure that his track record qualifies him to be unquestionably the best head of this new organisation in the absence of any kind of competitive process? Somehow, that does not seem quite right to me.

I wish the Secretary of State and the department every success in their task. It will not be easy but it can be done and I believe that, once it has been done, our procurement function will once again be fit for purpose.

16:15

[Lord King of Bridgwater (Con)]

My Lords, I am particularly pleased to follow the noble Lord, Lord Levene, in this debate. I think your Lordships will recognise that nobody in the country can speak with more authority on the subjects that are part of the Bill than the noble Lord. He has had quite exceptional experience in this field, having headed up the procurement executive and having been recalled by successive Secretaries of State to overhaul and review the programme of reform for the Ministry of Defence. I particularly echo one point that he made very forcibly. It has been a feature of opening speeches from the Front Benches to pay tribute to our Armed Forces. I readily endorse that of course but also pay tribute to the civilian members in the MoD who back them up. I exempt the current Secretary of State and Defence Ministers from this, but there is a tendency in other parts of the Government to decry civil servants and say that all their present problems are problems with the civil servants rather than necessarily with policies or things they have inherited. The Minister ended on a cheerful note, saying that he looked forward to this debate. I am not sure it is the easiest debate he will ever have to reply to in his career and I admire his optimism.

The Bill has three main parts. I have no comment on Part 2, about which other noble Lords have spoken, but will say a word about Part 3. I have considerable concern whether it will be possible to reach the numbers planned for the new reserve. I am an old TA officer used to serving my time with drill nights, a few training weekends and a few fortnight camps but am all too conscious of the different demands that are now made of people serving in the reserves. I used to spend a lot of my time as Secretary of State going round an organisation called TAVRA—the Territorial, Auxiliary and Volunteer Reserve Association—and persuading employers to encourage their employees to serve in the TA.

However, of course I was trying to sell an entirely different sort of menu from what is now required. The challenges for companies and for employees are now very much greater. I was struck by the comments made by Tobias Ellwood in a debate in another place. He is a Member of Parliament who is a former soldier and a former PPS, I think, to the Secretary of State and who continues to be a member of the Reserve Forces. His last exercise was in Laikipia in Kenya:

“Halfway through the two-and-a-half week exercise, we came together to discuss the future of the TA and its impact on each of us. Round the table, we had to say what would happen if we were required to break away from our jobs for nine months. Not one person in my group was able to put up their hand and say that their employer would be able to grant them permission to be away from work for that period”.—[Official Report, Commons, 16/7/13; col. 1009.]

That very much sums up my concern about this proposal. The amendment that the Secretary of State has announced in another place, which will come forward on Report, is extremely welcome. It will be necessary to watch this very carefully as it is in nobody’s interest to find, at the end of this period, that we have a substantial shortfall.

I note the criticisms that were made about Regular Army recruiting, which suggested that part of the problem was that it was not very good at recruiting people for the TA. That may be a little unkind and is simply a measure of the difficulty that it would have doing so. It clearly has to be recognised that, by contrast to what used to be the position in the TA, it will be extremely difficult for small employers to agree to their employees going off and run the risk that they may disappear for six or nine months.

Turning to Part 1, I have reservations about the proposed GOCO but I was very interested to see what the outcome of the competition would be. As the various candidates fell by the wayside, finally leaving just one competitor, I entirely understand why the Secretary of State has decided, and announced today, that he will not proceed with the proposal. It is fair to say that there are rather better omens than there might be for making a success of DE&S-plus.

I do not want to embarrass the noble Lord, Lord Levene. He quoted a report from 1991. I rather enjoyed that because I was Secretary of State at that time and he was in charge of procurement, and he showed what a much better performance was being achieved then than sadly has been the case more recently.

Only last Thursday my noble friend published in this House a Written Statement by the Secretary of State in connection with the second annual review by the noble Lord, Lord Levene, which recognised that there had been substantial progress. The Secretary of State said that there was,

“clear evidence that the Ministry of Defence has become more businesslike”.—[Official Report, 5/12/13; col. WS 37.]

which was, “very encouraging”.

There are real difficulties about a GOCO taking over the DE&S function. Certainly, as the noble Lord, Lord Levene, has said, I have no objection to GOCOs, because we did them. We did them in Devonport and Portsmouth and they were a great success. They had limited, targeted objectives—putting a company in charge of something with its commercial expertise and defined objectives—and nobody would criticise them now.

However, if you take the wider considerations for total procurement in excess of £10 billion a year, the implications are not simply about what is the best commercial deal; there are economic implications for every part of our country. There may be regional aspects to that; the future of an industry may be at stake; international collaborative ventures may have to be taken into account. What could well become a real headache for a future Secretary of State are possible conflicts of interest and allegations of failure and lack of impartiality in the treatment of contracts. There are also the security implications of foreign companies that are applying to become the GOCO operator working for other Governments as well. There is a range of issues that goes much further.

I hope that the proposal in the Secretary of State’s Statement, DE&S-plus, can be made to work and that we can build on existing capabilities. Many will have noticed the key paragraph in the Statement, that,

“we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury and Cabinet Office, around how it recruits, rewards, retains and manages staff along more commercial lines”.

That is a crucial decision, which seems to meet the challenge. There are many very experienced and talented people in the procurement field within the Ministry of Defence, but some of them lack wider senior commercial experience. If we can reinforce that, I have every hope that that could work.

It is against that background that I hope that we will also tackle one of the besetting sins of the Ministry of Defence over the years, and get greater continuity. People continually changing jobs is a problem in many government departments. We must build up that field of expertise with maximum continuity of employment.

The more difficult issue that I have to raise is that, if this is the Secretary of State’s announced decision today—and it has been referred to already—there is the question of whether we are really going forward with Part 1. I am in favour of giving every possible encouragement to the Government’s now announced decision for DE&S-plus. I hope that he can recruit the very best people to work in that, to reinforce it and to make it an effective body. It does not seem the ideal start for them if you say, “By the way, we may chuck it all in a couple of years’ time and, by the way, we don’t actually have to go back to Parliament because we already have an Act of Parliament in place that enables us to do it”. There is a difficult constitutional point as to whether this should be proceeded with at this stage. I am talking of course only about Part 1.

This has all happened in a great rush. We have had the Secretary of State’s announcement only this afternoon and not had a chance to discuss it. Your Lordships’ House does not vote against Second Readings so the Bill will proceed, but, between now and Committee, we have seriously to consider what really should happen to Part 1. I hope that we will give our fullest backing to DE&S-plus and make that work, and really see the improvement in the performance in MoD procurement to which I know the Secretary of State and all the Ministers in the department attach such enormous importance.

00:00

[Lord West of Spithead (Lab)]

My Lords, 72 years ago today in the South China Sea, HMS “Prince of Wales” and HMS “Repulse” were sunk by the Japanese. They were the first British capital ships to be sunk by aircraft and the last battleship and battle cruiser lost in action by our nation. I mention this because our debate today does not take place in a vacuum. In the final analysis, procurement is of importance to future UK strategy and the lives of our people.

On the Defence Reform Bill, I have considerable sympathy with what has been said by previous speakers, although the noble Lord, Lord Palmer, was wrong about the previous Government not trying to solve procurement problems. They tried in many ways to do that, but, like many Governments before, were defeated. Indeed, they even went so far as to call in Bernard Gray to find a way forward.

I believe that Part 1 of the Bill is now redundant. The noble Lord, Lord King, has explained very clearly why it is a real problem. The Government should think carefully about leaving it within the Bill, not least because of the uncertainty caused to industry but there are other factors as well. I was surprised that the Secretary of State’s Statement should come less than two hours before our debate, which is a slightly strange procedure and has made it quite difficult to focus on the detail, but I am sure that Part 1 has to go.

There is no doubt that the GOCO option was very high-risk. Indeed, many of us, including the noble Lord, Lord Levene of Portsoken, whom we have just heard talk so persuasively about this issue, and the noble Lord, Lord Lee of Trafford, have been vociferous in our opposition to the proposal. It is of great interest to note that Bernard Gray, who is the champion of GOCO, put the same proposal to the previous Government in 2006, who after considerable deliberation dismissed the idea as risky and potentially damaging to the national interest.

What is beyond doubt is that we have to do something about our procurement organisation—all of us have said that and all of us are aware of that—not least because, since SDR 2010, the procurement organisation failure to let contracts has resulted in about £1 billion of underspend each year that is lost to the department, even allowing for some rollover.

In its 2011 report, Ideas for Future UK Defence Procurement, Labour highlighted the problematic issues of defence procurement which had existed for decades and which, despite attempts such as the defence industrial strategy, smart procurement and calling in Bernard Gray, had not really been resolved. The summary of the recommendations of that review would be worth the Government’s scrutiny—indeed, they seem to have copied some of the ideas because DE&S-plus is very similar in many ways as it is being put forward. In naval parlance, I say, “Bravo Zulu”—the flag hoist for “well done”—to them for having taken some of those ideas on board.

Indeed, I would be pleased if the Secretary of State really had made a U-turn on GOCO. I know how embarrassing U-turns can be. When I was a Minister, I was in the back of a cab and the cabbie said, “I am going to do an Admiral West”. It was at the time of the 42 days debacle, if I can call it that. I said, “What?” and he said, “I am doing a U-turn”. I know how embarrassing it can be: you can get known for these sorts of things.

We must ensure that the DE&S-plus option has that small number of really special people at the top who have that commercial knowledge touched on by the noble Lord, Lord Levene. I second what the noble Lord, Lord King, said. In the Statement by the Secretary of State, I love where it mentions that,

“crucially, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury and Cabinet Office, around how it recruits, rewards, retains and manages staff along more commercial lines”.

That is really important, as the noble Lord, Lord King, touched on. However, it is not appropriate that Bernard Gray should be the chief executive of this, particularly if we leave Part 1 in the Bill. For 10 years or so, he has consistently pushed to have this and he will sit there while a Government will have the ability just to slot into the new system with no further real debate in this House. I do not think that that is appropriate. I find it quite surprising that Gray has been pushed forward for that.

On Part 2 of the Bill, relating to single-source contracts, I have concerns about the independence of the SSRO. That will need to be looked at very carefully in the debates over the next few weeks. There are some commercial sensibilities and difficulties here, as was touched on by the noble Lord, Lord Palmer. However, I am generally supportive of this and think it is going in the right direction.

On Part 3, I and many others have had concerns about recruiting reservists but it is important to put that in context. The reduction in the size of the Regular Army stemming from SDSR 2010 is on track. I have been very impressed by the effort that the Army has put into doing that, the way it has thought of things laterally and what has been done. That reduction calls for an Army in 2020 of 82,500 regulars. It is quite clear that the money to pay for more than those numbers will not be there post-2016 so things have to be done. It is quite right that the Army has done them.

Any talk of reversing this reduction and restructuring the Army is extremely foolhardy. For example, with the 8,500 men made redundant over the past 15 months, it would take about 15 years to grow those numbers again. Once you change the course of something like the Army, you cannot change it back again quickly. We must proceed with the next tranche of redundancies—I think it is about 1,500 but do not know—because we have to keep the course and momentum going. Recruiting of reservists is, strangely, a different issue. The Army apparently always knew that it would take five to six years to recruit up to the numbers required, so there is not a direct link to regular numbers by time. We need to be aware of that.

What is clear is that the removal of the serving soldiers from the recruiting service—about 800 of them—has had a devastating effect on recruitment, and Capita has not covered itself in glory. Shortfalls in IT have once again raised their ugly head and caused real problems. There are real problems in recruiting, to which I am sure the Government and the Secretary of State will apply themselves. We need to get this right, even allowing for the time-lag to do it. There are also problems with SMEs, for example, in allowing people to join. That has been touched on by a number of noble Lords, not least the noble Lords, Lord Palmer and Lord King. That will need to be resolved as well.

Lastly, we need to put down a marker that we cannot allow SDSR 2015 to be the disaster that SDSR 2010 was. Defence needs a budget that is a flat line plus 2%. We must not allow the SDSR, which will come two weeks after the general election, to knock off track such complex plans as, for example, Army 2020—just to pick on the Army one. It could do that if we get it wrong. The SDSR must be underpinned by an updated national security strategy, finished in plenty of time to allow SDSR 2015 to be conducted in a timely and not a rushed manner, as was done for SDSR 2010. We owe our people nothing less than that.

16:34

[Baroness Garden of Frognal (LD)]

My Lords, I thank my noble friend the Minister for updating us on the very recent developments in connection with the Bill, but I share the concerns around the Chamber that we have not had time to absorb the Statement. By the time we go into Committee, there will have been an opportunity for further clarity and reflection on the Government’s position.

I shall speak on Part 3, on the reserves, but will start with Part 1. The MoD has long had a reputation for poor management of equipment programmes, in which delays and overspends are not infrequent. The MoD is not alone among departments where budgets overrun initial estimates of time and cost but it does have to take into account factors which may not be present in other parts of government. For instance, the equipment that our Armed Forces need is at the cutting edge of technology. This will always bring uncertainties. It will have a long lifespan so it needs to be capable of repairs and upgrades, and flexible enough to be responsive to developments in weaponry in less friendly parts of the world.

Specifications would be complex enough without another factor outside the control of the MoD, namely the requirement to respond to political decisions. Ministers may wish to keep jobs in particular parts of the country to address employment needs or to ensure that skills are not lost. They may decide to commission equipment for a variety of reasons which are not first and foremost military. I concur with the noble Lord, Lord Levene, and my noble friend Lord King that those who serve in the MoD—military and civilian—are not only committed to public service but have a wealth of experience, expertise and knowledge which deserves to be given credit. There will be service men and women with first-hand experience of what does and does not work in conflict zones, working alongside military analysts, strategists and engineers. They may even be the same people. Why is it, then, that Governments have a tendency to look first to the private sector for guidance on the future for defence, with the assumption that the higher the fees and salaries paid, the better the quality of the advice? This may be a misplaced assumption.

As my noble friend the Minister set out, and as was said in today’s Statement:

“We have also started to address the business skills gap within DE&S ... by the recruitment of new senior finance and commercial staff from the private sector”.

I fully recognise that such enhanced skills may be available only in the private sector, but has there been any skills audit within the MoD to ensure that at least some of the business, financial, project management and HR skills might be met from within existing staff? After all, I remind your Lordships that it was highly paid private sector skills, brought in to address the undoubted problems of procurement, which led to a GOCO solution. There were reservations about the implication of such outsourcing, as noble Lords have already set out—and, as we now know, the model held little appeal for industry and has been put on hold. But neither GOCO nor DE&S-plus is proof against decisions taken at ministerial level for the broader good of the country. It is unreasonable to chastise the MoD when equipment is commissioned or adapted for non-operational reasons and to lay blame for mismanagement solely at its door.

I turn to Part 3 and the reserves. Two weeks ago this Chamber was filled with cadets in uniform from all around the UK who, along with veterans, were debating the legacy of the First World War. Their debating skills were immensely impressive; speaking thoughtfully and clearly, and keeping to time, they were a credit to your Lordships’ House. The contributions from the veterans were moving in demonstrating their personal struggles and achievements. We also heard of the inspiring work of military charities and volunteers. It was equally impressive in conversation to hear of these young people’s commitment to the Armed Forces, whether they were intending to join up or not. Among them are the service men and women, and the reserves, of the future. These are the people who can demonstrate to employers that they have personal and professional skills which are enhanced by military service, and which can be of immense benefit in civilian life, too.

The Royal Navy and the Royal Air Force face changes to their Reserve Forces but the main focus of the Bill is the effect on the Army, where, as we have heard, the reduction in the Regular Army from 102,000 to 82,000 is set to be balanced by an increase in the Army Reserve from 19,000 to 30,000. In managing this increase, a civilian contract company can do only so much. For these numbers to be achieved, champions are needed from within the services. Ex-regulars should be actively encouraged to engage. Cadets and veterans provide great role models for those considering joining the reserves. Their own enthusiasm encourages others to meet the challenges of service to their country. What support is being given to ensure that career advice and guidance sets out the very wide range of opportunities within regulars and reserves? I recognise there are sensitivities in this that must be observed with regard to recruitment, but we must face up to them if we are to achieve this timely change.

In the 21st century, warfare is seldom conventional. Reshaping our military will enable the services to operate more flexibly and cost-effectively. The additional demands on the Army Reserve Forces will require access to, and the use of, the same equipment and vehicles as regulars. As their training commitments increase to 40 days a year, so they will be paired with regulars for training and deployment purposes. This must be managed and monitored and I, too, welcome the amendment about the annual external scrutiny.

Employer engagement is key to the success of this initiative. Many larger employers need little convincing of the benefits that those with military training can bring to the business world. The military is trained to think around and through problems, to respond to fast-changing situations, to communicate with those around it, to work as a team and to show leadership. For large employers and, even more importantly, for small and medium-sized enterprises, it is important that the Government make clear the support on offer to ensure that business needs continue to be met, even when staff are called away for up to 12 months at a time. Noble Lords have already raised the concerns that this situation will bring.

For the reserves themselves, we shall seek assurances that their employment rights will be protected and that every consideration will be given to their physical and mental health. The Minister made reference to this in his opening remarks, but I note that a 2012 study from the King’s Centre for Military Health Research highlights the fact that reservists have more difficulty than regular soldiers with post-deployment social functioning, fitting back into family and civilian life and coping with stress, including post-traumatic stress disorder.

The Liberal Democrats have discussed this and propose that Army reserves should be regionalised to district areas, with regular commanders taking responsibility for all reservists in their area. Links to their families, to the Royal British Legion and to other military welfare organisations could play a role as a regular/reservist and veteran hub. Such an organisation could play a very welcome part in the community and help to alleviate some of the problems specific to reserves. Any increase in reserve numbers will call for comparable increases in medical and other support services to ensure that the duty of care, as set out in the military covenant, extends to both regulars and reserves.

The country quite rightly continues to express pride and admiration for our Armed Forces. With the right structures and safeguards in place, Part 3 will enable them to be reshaped in a way which fits them for service in the 21st century. We on these Benches look forward to scrutinising the Bill in Committee to ensure the best possible future for the indomitable men and women of the Navy, the Army and the Air Force. They deserve our attention to get this Bill right.

16:43

[Lord Stirrup (CB)]

My Lords, as other noble Lords have remarked, the uncertainty surrounding the Government’s intentions for defence acquisition and support have made it rather difficult to prepare for this debate. The first part of the Bill is designed to pave the way for a government-owned, contractor-operated solution and, as we have heard, that is no longer in prospect, at least in the short term. Nevertheless, there will be substantial changes to the way in which defence equipment is procured and supported, and it is important that we take the opportunity to reflect on the challenges involved, so my remarks will focus on this part of the Bill.

Over the past two decades we have seen major reviews and reforms of defence procurement every four or five years on average. Each one has aimed to resolve serious problems and each has achieved some improvement, but each has failed to address the central issue of cost and time overruns. Before proceeding with the latest of these reorganisations, it is perhaps worth asking why the problem has proved so intractable.

Some years ago, a major management consultancy firm conducted an independent assessment of defence procurement in nations with substantial armed forces. It concluded that the UK’s performance in this area was about average—not that it was good, but because the problems of time and cost overruns were fairly common across comparator nations. We should not be surprised by this. Some people might have the impression that the United States does better than we do, but the facts do not bear out that contention. The track record of complex projects, such as the F22 fighter, the F35 Lightning 2 Joint Strike Fighter, and the ill starred future combat system for the US Army, is unenviable.

One of our most successful acquisitions, in terms of cost and time, was the C17 transport aircraft, which has proved such a godsend in recent operations. We bought it, unmodified, off the shelf once it had been designed, developed and proved in service. It is worth noting that the C17’s development programme was so troubled that the United States Air Force would have cancelled it had there been any alternative.

These problems are not confined to defence. The London Olympics were rightly hailed as a great success story, but the final cost of the Games will be somewhere between four and 10 times the original estimate, depending on which figures one uses—and I probably need only mention the name “HS2”.

That is a description of the water, but, of course, the problem is how to avoid drowning in it. With this in mind, it is important to recognise that, in the case of defence acquisition, failure is not, unusually, an orphan, but has many parents. The first is the nature of the defence business itself. The efficacy and true value of defence equipment can be assessed accurately only once it has been employed tactically on operations, usually in competition with enemy systems and tactics. This problem becomes even more complex when we consider that the equipment being developed today will be tested in combat not tomorrow, but 10, 20 or even 30 years in the future. Judging the likely competition that far ahead, and thus the capabilities required, is no easy task.

The task is even more difficult when one considers the rate of change of some of the technologies involved. A great deal of military capability today relies on extensive computing power and information management systems. Our main attack aircraft, the Tornado, came into service some 30 years ago. Noble Lords may recall that in the early 1980s, the cutting-edge technocrats among us were playing around with the Commodore 64 computer, with its massive 64 kilobytes of memory, and not with iPads.

The second source of difficulty in defence acquisition is the wider political and industrial picture. If we bought everything off the shelf, as we did with the C17, we would have much greater predictability in our defence programme, but we would have no significant defence industry. Employment and order-book pressures may have no bearing on short-term military considerations, but they undoubtedly complicate the procurement of military capability.

The third problem is the annuality of the defence budget and the way this has been handled. In-year cost pressures have to be dealt with in-year, and the traditional way of approaching this has been to delay projects. This saves money in the short term but, of course, drives up the whole-life cost of the project considerably. The MoD’s institution of a contingency fund within the budget to help deal with such pressures is a sensible step, but the danger is that this will lead to persistent underspends, and the loss of funds back to the Treasury. A more sensible approach would surely be a long-term budget that had to be balanced over a period but not in each individual year.

The final problem I will touch on is the ability of defence acquisition personnel to negotiate and contract effectively with defence companies. I do not want to imply any criticism of the staff within defence equipment procurement and support. There seems to be a growing sense in the public sector that the way to improve the performance of personnel is to denigrate them. I do not consider this a wise policy, and I agree with the words of the noble Lord, Lord Levene of Portsoken, in this regard. However, there is considerable evidence to suggest that in some cases we are putting the wrong kind of people up to deal with defence companies. They find themselves overmatched, not by the intrinsic worth of their industry counterparts, but by their training and experience. The numbers may be small, but the malign effects can be very large.

This is not, in most cases, the fault of the people involved. It is the fault of the organisation that is exposing them in such a way. Defence equipment and support need negotiators and lawyers who can match those in industry, but to get them they will have to pay the going rate, which has not been possible under the present system. We certainly need to fix this, and I welcome the moves that the Minister has announced. However, I cannot believe that the GOCO route, which clearly remains an aspiration, is the only—or even the best—long-term way of going about this. Nor do I think that any solution will be a magic bullet, and I fear that there has been some sense of that in this afternoon’s debate. Staff skills levels and experience are a problem but, as I have tried to explain, there are many other challenges. The fundamental difficulty, to my mind, is how to combine cutting-edge technology with financial predictability.

Some have suggested that so-called “requirement creep” is the issue, and that if we define the requirement and leave it alone, we will solve many problems. This is probably true, but I doubt that it would represent value for money for the taxpayer in the long run. Equipment that from conception to out-of-service will be around for upwards of half a century must be kept up to date. The one thing worse than overspending on defence equipment is surely spending less on equipment that cannot do the job required of it.

I am reminded of the US defence company which, some years ago, tried to persuade us that it was better value to buy a fighter with 75% of the required capability but only 60% of the predicted cost. This demonstrated a total misunderstanding of the nature of value. The proposition might look attractive, but, when one understands that having 75% of the capability would mean losing 100% of the air combats, the picture changes. It is hard to think of a proposition that could offer worse value for money.

The problem, of course, is that changing the requirement does drive up the cost. To some extent, this is unavoidable, but I have long believed that we need a multitrack approach to our procurement processes. We can have the slow, majestic, leviathan process when it comes to large platforms. After all, the fundamental elements of an airframe or a ship do not change much or rapidly over its lifetime. However, we need capability spaces within those platforms. In these, we need plug in and play sensors, information systems and weapons to deliver cutting-edge capability. The acquisition of such systems needs to be much faster and more agile than the acquisition of the platforms themselves. This is one way in which we can square the circle of performance and financial predictability.

There are, of course, other possible approaches. What is important is that this latest attempt to reform defence acquisition and support should address the full range of underlying problems, not just one of them. If it does not, it will follow in the path of its many predecessor reforms; it will bring some improvement but make no substantial difference to the underlying issue—and in four or five years, we will be here again, discussing yet another set of proposals for reform.

16:53

[Baroness Dean of Thornton-le-Fylde (Lab)]

My Lords, in preparing for this debate, I was reminded that it was the first substantial defence debate that we will be having since the passing of the late Lord Gilbert. I have sure that had he been here today, he would have had some pretty direct remarks to make about the Defence Reform Bill.

The Bill received substantial cross-party support in the other place, certainly from the party of which I am a member, which substantially helped its process through Parliament. Yet we had today, just minutes before we started our debate, the Statement from the Secretary of State on what many regard as the key part of this Bill, the switch of our acquisitions to GOCO. In January 2011, Bernard Gray was appointed Chief of Defence Matériel. The following year, in July, the Secretary of State said in a Written Statement:

“I have decided that MoD should focus its effort on developing and testing the GOCO option further”.—[Official Report, Commons, 12/7/12; col. 124WS.]

A year later, in June this year, the White Paper, Better Defence Acquisition, said:

“The MoD intends to contract for the GOCO to act as its agent”—

with very little reference to the Defence Equipment and Support agency.

Therefore, it would appear from that time that GOCO was really the only show in town; there was no equal addressing of the alternative by the Government. Yet the impact assessment for Part 1 of the Bill says that there remains,

“substantial uncertainties over the level of costs and benefits”.

So, lots of questions are still to be answered.

The Acquisition Focus Group of the Royal United Services Institute questioned the GOCO, too, and concluded that it,

“suffers from an inherent weakness”.

As late as 28 November this year, in evidence to the House of Commons Defence Select Committee, Bernard Gray himself said:

“Initial estimates suggest a GOCO could deliver a net benefit of several hundred million pounds over 10 years”.

The House of Commons Defence Select Committee also raised issues on which it had concerns. The right honourable Member for North East Hampshire, the chairman of the committee, criticised the lack of detail on the DE&S-plus option. The letter of the noble Lord, Lord Levene, dated 13 November this year, on his second annual review, in section 5, referring to GOCO and DE&S-plus, said that this,

“needs to be brought quickly to a conclusion”.

I do not believe that we are at a conclusion, because today the Secretary of State issued a Statement saying that the Government are not proceeding at this stage with GOCO but that they wish to keep it in the Bill and see it go through the process in this House to become an Act, thereby creating a lot of confusion and insecurity as regards the alternative.

In another place, the shadow Defence Secretary at the time called for a “genuine comparison” between GOCO and DE&S-plus. I do not believe that that genuine comparison took place. Yet the Government seem to have suffered in the past three years from myopia in their full concentration on GOCO as the answer. Even when the number of bidders dropped from three to two and then to one, the Government did not change their mind. Yet in the Statement today the Secretary of State announced that they will change the DE&S to a new,

“bespoke central government trading entity”,

with effect from April next year. So there are lots of questions to be asked on that. I strongly question why the Bill has come to this place with Part 1 intact and with noble Lords being asked to agree, probably with amendments, that it should remain part of the Bill when the Government have announced that they are taking a different route at this stage.

I also question what the Statement in the other place claims—this has already been raised—about the transparency of governance of this new organisation. The Government announced, on the day when it was set up, the CEO who had been appointed. Where is the transparency there?

In the Statement, the Government also stated that,

“crucially, we will permit the new organisation significant freedoms and flexibilities, agreed with the Treasury and Cabinet Office”.

This may seem a facile question, but is that agreement in place, is it as broad as the Government could wish, or is it yet to be agreed? It does not say that it has been agreed; it could imply that it has yet to be agreed.

I move on to Part 2. It is generally agreed that the single-source contracts are a good and right way to go. Anyone who has been involved in a public procurement process, as I have, can regard it as a nightmare, and this certainly will improve matters. It establishes the Single Source Regulations Office as a non-departmental public body with effect from October 2014. Schedule 4 provides for the appointment of the membership of the SSRO by the Secretary of State. Some would question whether that guarantees the underlying independence. Will the Minister confirm that the process will be an open one, that we will not have another press release saying that the CEO has been appointed, and that the process of recruitment will be open and fair, and in accordance with public appointment requirements?

The schedule refers to the,

“‘non-executive members’ of the SSRO”.

However, it then goes on to say that the arrangements for those non-executive members can cover such things as pension and gratuity provision. My interpretation of practice in a normal plc is that non-executive directors do not get either of those benefits; they get a fee as a non-executive director and that is it. Therefore, the measure is most unusual and we will need to probe it in Committee.

Part 3 of the Bill concerns the Reserve Forces, and this issue has been covered substantially in discussion. However, will the Minister say how the recruitment drive is going? I am aware that the Government have twice promised dates on which they would report on the numbers recruited, but have now said that they will do so during 2014. What proportion of the personnel already recruited are recent members of the Armed Forces—perhaps some of those who are being made redundant? Who is carrying out the recruitment drive now that half the recruitment offices have been closed? Have the necessary resources been made available?

For the Government to say that they are satisfied is insufficient; we need to be confident that the switch from using full-time personnel to creating an expanded role for the reserves, which I think we are all generally in favour of, is not only going well but will fulfil the function that we intend it to fulfil, given that the redundancies among the full-time personnel in the Armed Forces will take place. Will the next set of redundancies that I believe the Army faces be held over until the Government are assured that the recruitment drive for the Reserve Forces is working well and will meet the targets that have been set for it?

The Bill raises many questions, and I hope that between now and Committee the Government will review their wish to retain Part 1 of the Bill. I think that it is defunct and no longer needed, and that the other parts of the Bill could become an effective Act without it.

17:02

[Lord Lee of Trafford (LD)]

My Lords, I want to focus my remarks on Part 1—the procurement aspects of the Bill. I could almost second the speech of the noble Lord, Lord Levene, on this subject. Let us be quite clear what has happened here. The GOCO horse, carrying the colours of Bernard Gray, has been pulled up. There was, frankly, little backing for this nag within either the civilian or the service sides of the MoD. Unfortunately, the Secretary of State decided to place his bet on GOCO and, frankly, faces some embarrassment today. I refer the House—this was mentioned earlier—to the ministerial Statement of 17 July 2012, which says:

“In the meantime, as resources and commercial appetite constrain our ability to pursue these two options simultaneously to the next stage, we have decided that the Department should focus its effort on further developing and testing the GOCO option”.—[Official Report, Commons, 17/7/12; col. 845.]

So, clearly, the GOCO option was the department’s favourite.

GOCOs are fine in certain circumstances. The noble Lord, Lord Levene, and others referred to the contractorisation of the dockyards. I was involved in that process, and supported it, when I was a Minister at the MoD. However, no other country and, to my knowledge, no other major plc, has effectively thrown in the towel and said, “We cannot handle our buying ourselves”. Huge amounts of civilian, ministerial and service time and at least £12 million have been wasted on this GOCO option. However, in my judgment it is the Treasury that historically carries the prime responsibility for this procurement fiasco through its bone-headed, penny-wise, pound-foolish approach, which over the years has prevented DE&S recruiting top talent from the private sector. It has effectively been emasculated and has proved no match for hard-nosed defence contractors, as was referred to earlier. We were told this afternoon that at present DE&S has 800—I repeat, 800—vacancies. In recent years, it has had to employ very expensive consultants. Perhaps when my noble friend sums up he can indicate just how much the MoD is spending on consultants.

Thankfully the Treasury, under pressure, has now got real and has given certain new freedoms to DE&S-plus. I am sure that we all wish it well. Excellent personnel are already there, as a number of noble Lords mentioned —in fact, all noble Lords who have spoken referred to that aspect. It will be strengthened and augmented, we hope, by top-drawer recruitment from the private sector. However, I must ask, first, whether we are giving DE&S-plus a chance. As the noble Baroness, Lady Dean, said, is it sensible or fair to retain the GOCO option in the Bill, almost as a sword of Damocles hanging over the future DE&S-plus? Is it going to encourage top personnel to give up their careers in the private sector and join this organisation if some future Government in a few years’ time are going to go back to the GOCO option and argument? Secondly, does it really make sense for the morale of this new organisation to have its new chief executive in Bernard Gray, the person who drove the alternative option that clearly has failed and fallen?

I should like to ask my noble friend three or four specific questions to which I should like him to refer in his wind-up speech, or, if not, perhaps he can write to me. First, can we have more details of the freedoms that the Treasury is going to give DE&S-plus? Will there be an additional block of money available to it or is there going to be some sort of limitation on the numbers employed? Is there going to be any maximum salary level? Secondly, what is the duration, if any, of Bernard Gray’s contract with the new organisation? What is his salary going to be? Will it increase or, bluntly, will it be a reward for failure? Thirdly, is the new chairman being brought in going to be an executive or non-executive chairman? Finally, on the question of the GOCO competition, what is the position regarding compensation for the remaining Bechtel-led consortium? Is there any likelihood of significant compensation having to be paid out?

17:08

[Lord Craig of Radley (CB)]

My Lords, I do not have much sympathy for GOCO defence procurement. My doubts have been strengthened by the lack of genuine competition and therefore interest from the private sector. The Government are right to pause this approach, but I remain sceptical that the pause and the changed approach announced by Ministers will resolve the fundamental problems affecting advanced platform and weapons systems procurement.

Those of your Lordships who have been involved with defence issues over the past 50 years and more will recall that this is but the latest of numerous attempts to solve difficulties in defence procurement. When the Ministry of Supply was abolished in 1959, defence procurement passed initially to the three single-service ministries until the Ministry of Defence took overall responsibility in 1964. Before that there had been some serious overspends on equipment.

In 1961, the Gibb-Zuckerman report recommended a common, improved process of milestones past which every major project would have to proceed. By the mid-1960s further spectacular cost overruns triggered the establishment of a development cost steering group, chaired by a Mr Downey. The group made further changes but few of these efforts were any more successful. At a time when the Warsaw Pact seemed at its most dangerous, the MoD was inevitably ambitious in its requirements. The three services, the research establishments and industry erroneously felt that technical and integration problems, only revealed during full development, could be resolved—maybe so, but at much increased cost and timescales; and occasionally never, leading to cancellation of a major programme after much time, effort and money had been spent. That is all too similar to experiences 50 years later in 2010, I fear. Cost-plus was much in vogue.

By the early 1980s, exasperated by what he felt was a too-close relationship between the services and their industrial suppliers, the then Defence Secretary, Michael Heseltine, now the noble Lord, Lord Heseltine, decreed that there must be no more fraternisation between the two sides. He also invited Peter Levene, now the noble Lord, Lord Levene, from private industry to fill a new appointment of Chief of Defence Procurement in 1985, as we know. Improvements came: cost-plus was out, competition was in, but initial better outcomes were not sustained after about 1991. More recently, we have seen and forgotten the smart procurement of 1998, which collapsed due to inadequate funding of defence, and was later renamed smart acquisition, but I fear was no better funded.

Concurrently, overambitious, rushed and disruptive reorganisation of procurement and logistics responsibilities and downsizing caused distortion, much frustration and dismay among staff involved. Mr Bernard Gray’s 2009 study of this generic problem recommended that 10-year rolling defence budgets and 20-year equipment budgets published to Parliament should be adopted—no signs of that. The nearest—and minimalist—has been the Prime Minister’s assurance that the equipment budget would increase by 1% after the next election. This is the basis for the affordable equipment programme announced last year for the period 2015-16 through to 2020-21 but, as the NAO has commented, this does not and will not offer a definitive view of the affordability of the equipment plan, as more time and experience will be required to assess its worth. Moreover, it is far from clear whether this raise for equipment is additional to the whole defence budget or will have to be offset by reductions elsewhere in MoD spending, as the Chancellor proposed only last week. Of course, there is a general election in 18 months so nothing can be definitive.

I have only briefly itemised some of the attempts to do better in procurement over the past 50 years. Much more could be said. Of course, it is right to try to do better, but sometimes the MoD seems to be the whipping boy of Whitehall over poor procurement, and cost and timescale overruns. Other departments with much less challenging requirements seem to suffer major cost and timescale overruns without being subject to such excoriating criticism—for example, the NHS’s repeated nationwide computing failures; the National Offender Management Service’s information system being 400% over budget; the tenfold rise in the cost of the Scottish Parliament; Transport for London modernisation, with billions of pounds underestimated; the numerous PFI schemes that have left the taxpayer billions of pounds worse off than before these wheezes were introduced. The successful Olympics bid, which has already been mentioned, started off at £2.9 billion, only to finish close on £9 billion—and the hard-pressed Armed Forces saved the day for the whole enterprise when G4S messed up. Until—and do not hold your breath—Governments of the day, with opposition support, are prepared to approve the sort of decade-long, rolling budgets recommended by Bernard Gray, and to stick to them, I fear that budget aspiration rather than reality will remain the quicksand basis of government procurement planning and costing.

A further and often overlooked issue is the political, and sometimes party-political, pressures on Ministers to adjust programmes to sustain industrial capacity or employment. Should such additional costs be totally met from within the defence budget? Some form of Treasury contingency funding might be made available when such adjustments to programmes are not for military or technical reasons. Further costs, which are hard to quantify in advance, will arise within multilateral programmes and be beyond the control of the Ministry of Defence. In over 50 years the right answer has evaded all; no silver bullet has been found. It should be no surprise, unless the Government and Treasury adopt a totally different approach, if it were to remain unresolved in the next 50 years. Meanwhile, I shall watch with interest how the latest scheme matures.

There is much in the Bill about the Single Source Regulations Office, enough to emphasise its importance for obtaining value for money. It is said to be free of government but where does it stand with the Treasury, which also has authority and interest in value for money? Will the SSRO be free from Treasury second-guessing, or will it merely be a further bureaucratic stage when dealing with single-source contractors?

Turning to concerns expressed in your Lordships’ House and elsewhere about the legal erosion of our national fighting power, I fear that this may extend further than the battlefield and into the field of procurement and technical support. When I was flying Vulcan and Victor bombers, only the two pilots had ejection seats. The rear crew members had to rely on parachutes if their aircraft had to be abandoned in flight. Fitting ejection seats for all at the design stage was deemed technically very complex, with unacceptable time delays into service, and costly. At various times, following tragic fatal air accidents of these aircraft on training flights, the possibility of fitting ejection seats for all crew members was re-examined. Once again, cost, complexity and the loss of airframes from the front line while modifications were installed were deemed excessive in any attempt to reduce the relatively low-frequency risk of a similar future air disaster. Indeed, I am not aware that any claims by relatives were made in those days—probably Crown immunity then would have ruled them out—although the additional life insurance premium to cover flying risk was largely met by the ministry.

Today, when coroners and courts are keen to investigate the background to individual service deaths, there is a growing tendency to question why particular modifications or kit which could have been made available and might have averted the individual’s death were not available. Such an approach cannot take full and proper informed account of the complexities of the design or later modification, the downtime to carry out the necessary work and the remaining in-service life of the aircraft fleet or other equipment involved. Additional cost, too, of course arises. Is it better to pay that much to ameliorate one risk of catastrophe over, say, a few years of remaining in-service life, and not be able to afford to do more for other potentially higher and longer-lasting risks?

My fear is that this legal probing, basking in the certainty of 20:20 hindsight, will extend to questioning why original designs or modifications which subsequently proved unable to match the opposition’s capability were allowed to persist or be deployed or, alternatively, why additional steps had not been approved though the technical capability existed. Such concerns should be borne in mind in any changes to responsibility for defence procurement. Indeed, they should add further stimulus to taking positive action to reinstate immunities in a field of activity where acceptance of risk to life has to be the norm if our forces are not to be gravely neutered by legal hindsight.

I turn to the reserves. There is nothing in the Bill that would expedite the call-out of individual or small cadres of reservists, whose earliest possible availability is essential to the preparation and mounting of an intended operation. With greater reliance on ready Reserve Forces, the current statutory requirement that ministerial approval has to be obtained before the call-out of any reservists needs to be reviewed. Delegated ministerial authority to service chiefs for small and key critical reserve elements would ensure that those individuals who are already at high readiness would be immediately on task when required. What assurance can the Minister give that such delegation is covered by current legislation, and perhaps by Clause 45, or should it be a matter for amendment? With a policy to rely more than ever on the employment of reservists alongside Regular Forces, their early availability is a key requirement and must be assured in all circumstances.

17:20

[Baroness Cohen of Pimlico (Lab)]

My Lords, I shall speak on Part 1 of the Bill since that is where my experience of the MoD rests. I also speak as what seems to be a highly unpopular advocate of continuing to seek out a GOCO option. My qualifications for speaking on procurement rest on part-time involvement with the MoD in general and with the then newly formed Defence Logistics Organisation, in particular from 1998 to 2005. I was drafted in by the then Secretary of State for Defence, George Robertson, now my noble friend Lord Robertson of Port Ellen, to be one of the group of 12 wise men and only three wise women to critique the emerging conclusions of the strategic defence review. I went straight for the logistics and procurement end, using my experience of advising Unipart for many years, and having worked with Alan Rudge at BT and Richard Lapthorne of BAE. When we concluded our review, it was decided to put together the logistics for all three services under one newly formed organisation, the Defence Logistics Organisation, but not to try to put the new organisation together with the major procurement organisation on the grounds that it was a bridge too far. At all events, I ended up the following year as the only non-executive director of the Defence Logistics Organisation under General Sir Sam Cowan. I stayed in the same role at the request of his successor, Air Chief Marshal Sir Malcolm Pledger, and refused to stay with his successor only because I felt, after six years, that I had shot my bolt.

I read the White Paper, Better Defence Acquisition, of June 2013—which, after all, is terribly recent—with real pleasure. The writing is clear and elegant, and it makes an absolutely uncompromising analysis of the root causes of underperformance in defence acquisition. I know that it had the admirable report by Bernard Gray in 2009, and the equally admirable report published in June 2011 from the committee chaired by the noble Lord, Lord Levene, to draw on. Those reports brought back painful memories of what I and my fellow non-executive directors had failed to achieve.

The first root cause of failure identified was a not quite steady and overly ambitious equipment programme. Back in 1999, I encountered a forward programme which contained, at the end of it all, all sorts of projects and kits labelled “at risk”. I asked what “at risk” meant, and found out that they turned out to be projects for which there was no money and would not be any in the foreseeable future. Feeling rather like the customer in the famous dead parrot sketch, I pointed out that a project for which there were no funds was not at risk: it was dead, it was an ex-project. All agreed courteously that I was right, but the “at risk” list stayed on the books and in the planning. Military personnel are, in the main, intelligent and practical men, so I decided that they must know something that I did not. Indeed, as it turned out, they know as they have known since before Waterloo that if you have a favoured project and can keep it on the books, you might get it in the end—usually because a war comes along. Of course, the Treasury pays for war; the defence budget gets us a standing army but it does not, on the whole, pay for a war.

Worse, you can go on spending a bit of cash on this project and committing yourself to more so that, in the end, it becomes cheaper to go on than to stop. I need hardly say that the energy and politics devoted to all this took up a lot of valuable time. I know that the MoD and the current Secretary of State, to whom I give great credit, have tried to stamp out unrealistic budgeting, but the White Paper describes the present position as a “balanced, if taut” MoD budget. Experience suggests that “taut” is probably code for there being at least two projects for which there are not enough funds, but which are being held in there on the basis of hope.

The second root cause identified by the White Paper is an unstable interface between the requester and the deliverer. In three paragraphs, it says concisely and very graciously that the MoD is a terrible customer and cannot do anything without wanting extras or wanting to do it differently half way through the contract. Anyone who has done any contracting, even for home improvement, knows that that costs money and causes delay. It is difficult to know how to change that.

The third root cause is that there are insufficient skills and management freedom within DE&S. That is indisputably true. There are many excellent people in the MoD, but the project management stars needed are in the private sector, being paid twice as much as anyone in the MoD and, above all, being given freedom to do their jobs without interference.

I also agree with the White Paper’s conclusions. That is why I am so disappointed that the GOCO proposal has fallen. Indeed, I am prepared to put the White Paper’s conclusions more bluntly. The causes of underperformance are endemic and deeply rooted in MoD culture, which resists outside reform, and has done since Waterloo. The MoD has real strengths. It is manned by many excellent people, who feel that they know best. It has gracefully seen off many an outsider. I am sorry to find myself on the other side from my noble friend Lord Levene and the noble Lord, Lord King, since one of them ran defence procurement and the other was Secretary of State. However, radical reform involving giving cash and authority to a GOCO is the only thing that will work. I urge this Government, and I shall be urging a Labour Government when we have one again—soon I hope—to look again at the analysis in this White Paper.

Since I have already probably blown my chances of being appointed Chief of the Defence Staff, I shall go further and suggest that in continuing our search for a GOCO we may have to go about our contracting in a different way. To paraphrase Lady Bracknell, to lose two out of three of the essential private sector candidates suggests not carelessness, but that contract conditions—drawn up by the MoD—may have been too restrictive, and/or may have allowed for unfeasible and expensive interference by the department, or may have been unrealistic in their cost expectations. Indeed I remember that one of the bidders dropped out on the basis that they could not make a living on the contract. We might need to get an outside expert view on how the contract is drafted.

I am reminded of a story—no doubt apocryphal—about a meeting between Louis XIV, the Sun King, and a rebel peasant in the Fronde uprising. Louis XIV condemned the peasant to death but the man successfully pleaded for a year’s stay of execution on the promise that his life would be spared if by then he had taught the king’s horse to talk. His friends, and probably the horse, inquired of him what had possessed him to make so rash a promise. “Ah,” the peasant said, “In a year’s time, the horse may be dead, or I may be dead, or the king may be dead, or the horse may talk”. This of course is a parable about towing a problem along. That is what we are doing if we attempt to solve these deeply rooted problems within the same structure and with the same people that have perpetuated them. It is not the right use of scarce public resources now; nor is it the best future for the armed services.

17:29

[Baroness Doocey (LD)]

My Lords, I will speak to Part 3 of the Bill to highlight concerns about forces welfare, and in particular the welfare of those serving in the Army Reserve. The Bill includes important provisions to protect the employment rights of reservists, which is clearly right. However, we must consider how we can improve reservists’ welfare in other ways. After all, the real task is to attract large numbers of new recruits if the targets for reservists are to be met. In doing so, we should learn lessons from important welfare issues affecting the whole service.

Housing is among the most important of those welfare issues, not only for personnel currently serving but for those leaving the service. The Army Families Federation reports that the poor standard of maintenance and repair is the biggest problem for Army families. Although the current standard of accommodation is undoubtedly the result of decades of underinvestment, the fact that it persists to such a degree is, I am told, largely due to the way that prime contractors are incentivised. Service families whom I have met describe the situation as woeful, and maintenance and repair problems are the subject of endless complaints.

Last year, the Defence Select Committee investigated accommodation provided by the MoD. It reported that less than 50% of the single living accommodation units in the UK are in the top two grades of quality, even though the target set by the MoD is 90%. Indeed, more than a third of this accommodation is in the bottom grade. I welcome the substantial investment in accommodation for service families in recent years, which has seen more than 90% of the homes for service families brought into the top two quality grades, but the same approach is needed for the rest of the accommodation estate.

Forces personnel also face issues trying to find a home when they leave the service. The homelessness charity Homeless Link conducts the annual Survey Of Needs and Provision, which shows that the problem of ex-forces personnel sleeping rough, in hostels or in supported accommodation, is widespread. It reports that half the day centres in England say that they work with ex-service personnel and that those personnel face a high risk of falling into patterns of rough sleeping. We must acknowledge our responsibilities to the welfare of service personnel—regulars and reservists.

The Bill before us tackles job security for our reserves, opens the door to longer periods of deployment and promises to improve the incentives and compensation arrangements for employers. These are very good steps forward. However, if we are to attract the broad range of skills and people to greatly expand our Reserve Forces, we must have an answer for them on welfare issues such as their healthcare, their mental state and their family-life balance. Ensuring decent accommodation which is properly and regularly maintained for our regular forces should be seen as part and parcel of this approach.

17:33

[Lord Davies of Stamford (Lab)]

My Lords, I do not want to take up too much time, so will address only Part 1 and reserve my comments on Parts 2 and 3 for later stages in the Bill’s progress.

If anything can be said about the Government and defence—quite modestly and unexceptionably, because the points are so blatantly obvious—it is that this Government do not care much about defence and that their judgment in defence matters is pretty poor. In the course of three and a half years, they are well on their way to running the Army down from 100,000 to 82,000, they have abolished our carrier strike capability, they have abolished entirely our long-range maritime surveillance capability and they have reduced our capability in helicopters, in naval escorts— I think we are now down to 13 naval escorts from 22 when the previous Government left office—and in many other areas.

We are told all the time that that is due to a shortage of funds, but in fact the Government had a surplus in 2011-12, which was then entirely lost to the Treasury. There was then an extraordinary surplus of £2 billion, more or less, in the last financial year, ending in April 2013, some of which has been lost to the Treasury. The Government complacently say that a lot of it has been rolled over, but even this Government must realise that if you do that, at the very best you are delivering equipment a year later than it should have been delivered, and because of the time value of money, your money does not buy as much as it otherwise would do. That has been a disaster for defence—a completely self-made disaster.

On top of all that, we have had this extraordinary, monumental shambles today—something that in future years we will look back on as a memorable shambles—in which the Government, on the very day that they are introducing an important Bill at Second Reading, make a Statement a couple of hours beforehand saying that the first part of the Bill is inoperable and that they do not intend to take it forward in the foreseeable future. The Government have ended up with the worst of all possible worlds. That is the absolute obverse of good leadership and good management.

The Government are keeping both their feet on both sides of the fence. They are not taking a clear decision. Of course that will be damaging to the morale and momentum of DE&S-plus and of course it will be damaging to recruitment, particularly at higher levels. People going in at the higher level are precisely the sort of people who will be displaced in the event that, a few years down the line, the Government switch to the GOCO course and Bechtel or Boeing or Serco or someone comes in and puts its own staff in these senior decision-making posts. It is utterly naive not to suppose that there will be real damage from this continued indecision by the Government. We have had too much indecision already; we might at least have expected and been entitled to a clear decision at this stage.

The decision should be quite clear: we should junk the idea of the GOCO altogether. I totally agree with the points that have been made about GOCO by a lot of people whom I know well and who know an awful lot about defence: the noble Lord, Lord Levene, and the noble and gallant Lords, Lord Stirrup and Lord Craig, and others who have spoken in this debate.

Of course, the Government have run into a lot of problems with industry over the GOCO proposal, mostly about conflicts of interest and treatment of intellectual property. However, there are two much more fundamental reasons why the whole idea was completely misconceived from the beginning. The first is that defence procurement is and ought to be and ought always to be core business for the Ministry of Defence. It is exactly like recruitment or training; what we are talking about is producing the essential inputs into defence capability. The MoD must be in charge of that and must understand that.

What is more, if the Government give up that capability and that knowledge, they will not get it back. There are all sorts of people now in the MoD and DE&S—I know them well—who can negotiate a contract with a GOCO partner if you want one. But if you actually sign that contract and give up your role running defence procurement to some private sector partner, in five years’ time or whenever you renew the contract, you will be at a very considerable disadvantage, and in 10 years’ time you will not be able at all to have an intelligent or effective negotiation or to monitor intelligently what is going on. It is very important that this should remain a core function and a core expertise of any Ministry of Defence worthy of the name. That is true in this country and elsewhere; it always has been and I believe it always should be.

The second fundamental reason why the GOCO proposal was misconceived and a mistake in principle from the beginning is that an essential part of defence procurement is flexibility. The enemy has a vote in this. You have to take the enemy into account. The enemy may change; the enemy may change his tactics and you have to change your procurement policy accordingly.

When I was defence procurement Minister, I held a meeting in my office every month on counter-IED policy. I had the experts there from DE&S and of course our own capability people and people from PJHQ, and the absolute experts from the various research institutes that we have at Fort Halstead and so forth. They are brilliant; I want to pay tribute to them now. I am full of admiration, and always will be for the rest of my life, for their expertise and dedication. They get no public recognition at all for their role.

We also had the Americans there. I had negotiated an open-eyes agreement with my American counterpart, Ash Carter, on counter-IED. We had an American colonel and she always contributed very usefully to our meetings. In those meetings we quite frequently decided then and there, that afternoon, to change our procurement of some particular technology or item of equipment and switch it to something else, usually in the UOR programme but it sometimes involved adjusting a core programme as well. You needed to do that because the enemy was changing and the enemy’s tactics were changing, and we wanted to save lives and win operations. Those are the fundamental obligations of any Defence Minister, which must override any other consideration.

It is quite wrong to give up that flexibility. You need flexibility for other reasons. I made it a principle—I have no idea whether the Government continue with it, but I hope that they do—that before I authorised any major programme, I always investigated whether we could do it in collaboration with an ally. If you do that, not only do you share the research and development costs and the risks but you get longer production runs, and the very considerable fixed overheads then spread over a greater production run, which is highly desirable. I had a lot of successes in that, particularly with the French, where we did a lot of things. One example was in underwater programmes. I invited them into the Mantis UAV programme. We did the new turret for the Warrior and the Scout vehicle together. These were successful examples of international collaboration requiring great flexibility.

If you had an annual, biannual or five-year contract with a GOCO to procure things on your behalf, you would have to hold up the whole process. You would have to talk to them; you would have to negotiate with them; and it would take time. What is more, it would take money. Money is what motivates the private sector—quite rightly and understandably so—and it knows perfectly well that the way in which it makes the real money out of government is when the Government change their mind, change their specification and want to do something differently. That is always the great moment, when you get penalties and you can increase your prices. That is exactly the situation which we must not find ourselves in and why we must not go down the GOCO route. I hope that we hear no more about the GOCO. However, I am extremely disappointed: it is a fundamental failure of government not to reach a clear decision and to let the country and everybody involved in defence procurement, in industry and within the MoD, know exactly where we stand, and to maintain this uncertainty which they have created, quite gratuitously, in the coming months and years.

What is the solution? I do not want ever to be accused in this House of criticising without saying what I would like to do and what I believe is the right solution. I think that we should proceed with the DE&S as it currently is and make steady, incremental improvements to it. Any human institution, of course, can be improved, and that is true of the DE&S. The DE&S contains wonderful people of enormous ability and enormous dedication, enthusiasm and commitment. When I was putting together the Scout programme, I remember there being a big time factor there. We succeeded in getting the whole process, which would normally take about two years, done in about 13 weeks. People were working through the night and through the weekends. They are superb people. Of course, they do not have quite enough of certain types of expertise—some in the financial area and some in the project engineering area—and that must be remedied, as Kevin O’Donoghue and I were trying to do. We did so often by secondments from the private sector. You cannot bring in people to deal with contracts of their own companies, of course, but you can put them in other parts of the DE&S and they will learn a lot about government procurement and you will learn a lot from their particular expertise during those secondments.

You can also do something which I did not have the occasion to do but thought of doing on several occasions. Where you have a particularly complicated and difficult project, you could perhaps bring in a private sector partner to be alongside you in the negotiations. I would have done that on the future tanker programme, which had gone on for eight or nine years when I took over. Luckily, the people concerned came to a conclusion rather rapidly after I came on board and avoided that particular fate. That is something that we should look at.

Above all, I do not believe that the DE&S needs a new corporate structure. That creates barriers, inflexibilities and some of the problems to which I have already referred. I totally agree with the noble and gallant Lord, Lord Stirrup. He was quite right in what he just said about the international position. Of course, we have had big problems with cost and time overruns—you always have those in defence procurement if you are at the cutting edge of technology. By definition, nobody can predict exactly the time and costs involved in solving technical problems at the cutting edge—at the coal face. That is absolutely inevitable. If you look at how the French and the Americans do it—those are the only comparisons really worth making because other people are not normally at the cutting edge of technology—you will see that the position is very similar there. The Americans have far worse cost overruns. Their time overruns are not quite so bad because they throw enormous amounts of money at something when they run into a problem.

However, that is not a reason for complacency. There is enormous scope for improving the DE&S, and it should be steadily improved in the way that I have described, but we should in no circumstances destroy any of its enormous qualities. We should in no circumstances throw over this particular institution lightly and set up something else which we would live to regret.

Finally, I want to ask some specific questions of the Minister. If he does not have answers for me now, I ask him to write to me and place a copy of the letter in the House. First, was it by accident or design that the approximately £2 billion surplus was accumulated in the MoD in the last financial year? Secondly, are the Government providing for or expecting to make compensation to Bechtel for withdrawing the competition in which it was engaged and on which it would have spent a lot of money? Thirdly, what is the total cost of this GOCO exercise, including any compensation to contractors if that arises? Fourthly, what is the pay or total remuneration package for Bernard Gray in his new role? Fifthly—the matter has been raised this afternoon but nobody seems to have any clue to the answer—why was it that, extraordinarily in this case, the normal processes for open, public recruitment were overridden and a special deal was done with one particular nominated individual?

17:45

[Lord Tunnicliffe (Lab)]

My Lords, this has been a very interesting debate. One realised as one listened the extent of the knowledge of, and involvement in, defence over many years represented in the Chamber today. My credentials are somewhat modest. My noble friend Lady Cohen set out hers, but did not mention the role she handed on to me. I spent two very interesting years as a non-executive director of DLO, the defence procurement agency, and was involved in the merger that created DE&S.

I expected to be in the somewhat minority view, arguing for some respect and admiration for the quality of the people in DE&S, but I find that I follow the noble Lords, Lord Levene, Lord King and Lord Lee, the noble and gallant Lord, Lord Stirrup, and my noble friend Lord Davies in saying that these are good people doing a good job. As the noble Baroness, Lady Garden, pointed out, it is tremendously complex—a very big procurement job and one, as my noble friend Lord Davies said, in a constantly changing field. They are much underrated and I would certainly like to set down my name as one who admires them, as I admire the Armed Forces in general.

There has obviously been an ongoing challenge in defence procurement. We on this side accepted that general challenge and much of the direction the Government were going in. We were willing to see a GOCO option if, through a process of competition, it could be refined into something credible that would do substantially more than DE&S being developed in a favourable environment. However, that competition went away. Only one bidder was left. Reluctantly, I welcome the decision—someone has to welcome the Government at some point—to abandon the competition and concentrate on DE&S. DE&S has the fundamental talent, provided it is supplemented. The noble Lord, Lord Levene, made the point that it would take a relatively modest number of additional people in focused roles to rise to the DE&S-plus challenge and meet the objectives that we all have in mind, and the needs of the taxpayer and front-line people.

We have a little bit of a mix-up today, with a debate on a Statement and a debate on a Bill. I have a few questions about the Statement. I will repeat some of the questions put by my noble friend Lord Davies because I informed the Minister about mine and expect him to answer them today. First, does the new entity require any legislation? As far as I can see, it does not. This can be done administratively within the present law. There is mention in the Statement about the accounting officer’s budget. Will that budget be merely for the operation of DE&S, or is this the procurement budget of £8 billion or £10 billion, depending on how you look at it? That is very important because if the accounting officer holds the budget he can, in a sense, insist on that firmer line between the front-line commands and the DE&S providers. Could the Minister also set out in more detail the new freedoms when it comes to pay? In other appointments over the past months, there has been talk that no appointment should be made at a rate that exceeds the Prime Minister’s salary. That will clearly be too limiting in this case. Are the freedoms such that that sort of arbitrary limit is not there?

We also have the very important issue of how appointments to these roles will be made. I think that the Secretary of State referred in the Commons to something like an accelerated system. We have spent a lot of time in this country worrying about public appointments. We have a Commissioner for Public Appointments, so at least some regard has to be taken for the work of that commission and how the new appointment process may give us better, faster results yet still meet the tests of fairness and opportunity that the public appointments commission represents.

To be very specific: how was Bernard Gray appointed? The Government have to be responsible for that appointment, but can we at least know how the decision was made and what public appointments criteria were checked off before it was made? We should know what Bernard Gray is to be paid because that will illustrate whether the Government are serious about breaking free from constraints in payments. It was perfectly reasonable at the time of the appointment of the Governor of the Bank of England that his salary and conditions were openly presented, and it should happen now.

Finally, in the Statement, which I will come back to, there is the concept that we might go for a GOCO at some time. Can the Minister offer some clarity on that? Are we talking about it being before the next election, immediately after it or further in the future?

Turning to the Bill, first, I join with other noble Lords in asking the Government most sincerely to withdraw Part 1. The intention of legislation must be to deliver a tangible outcome. You have to have a concept when you are working on creating it: what is it going to deliver? The legislation to create the GOCO is quite complicated—I will come to that—but at least there was something there. We had a White Paper about it and there had been some description and discussion of it. There was some background about the tangible thing that we were debating. We will not now be debating something that is going to happen in a near timescale. It will be a debate in a vacuum. It will almost be a philosophy seminar, as we will have to carry notions of “What if this?” and “What if that?”, and of how it fits together.

Finally, it will have the most undesirable effects on DE&S because it will be like a sword of Damocles. At the whim of a Minister, with no scrutiny from this House or the House of Commons, the whole issue relating to defence procurement can be transferred to a GOCO if we pass Part 1 of the Bill. I implore the Government to withdraw Part 1 and to let us spend our time concentrating on Parts 2 and 3. In the mean time, let us encourage DE&S to continue with its improvement programme, using its new freedoms. If the new freedoms need any legislation, of course that can be wound into it, but we should not have to contemplate or discuss a theoretical concept of such magnitude that it will have no impact within a near timescale.

Sadly, the Government will perhaps not listen to me and we will have to discuss the GOCO. As the noble and gallant Lord, Lord Stirrup, said, superficially it is not a magic bullet. We will have to work through a lot of questions. There are issues of conflicts of interest, the retention of sovereignty and the protection and supply of intellectual property. How will Chinese walls work within the various parts of the consortium that are also parts of larger firms? How will the civil and criminal penalties work in order to make these protections credible to the outside world? The concept was that it might go for nine years and then end. What will be done to require the GOCO company to protect skills, so that if those things are taken back into the public sector, the skills base will be retained?

We will need to look at the essence of why a GOCO is a good idea. When talking about GOCOs, the Government are tangentially talking about risk transfer; I believe that the Minister actually referred to it in the remarks that he made in opening the debate. Among my credentials is that I have been a client of Bechtel. I have to tell noble Lords that Riley Bechtel has never transferred one iota of risk. He is brilliant at running a firm that adds value—let us not get too upset about that—but the only thing that Riley Bechtel puts at risk is the size of his profit. He does not put Bechtel’s basic assets at risk. There will be no risk transfer if the Government’s target is someone like Bechtel. I am willing to be proved wrong on that, but if we must discuss Part 1 then we will be testing the Government on risk transfer.

We now come back to the question of added value. Sometimes when the Government talk about this, the added value seems to be solely about the ability to employ people. Suddenly, at a stroke, the Government seem to have solved the problem of employing people by getting new freedoms. But discussing the issue is very complicated without a tangible action in front of us.

I turn to Part 2 of the Bill. Superficially, single-source contracting is going to be pretty boring. However, anyone who has been involved in this area—not just the military but any area where de facto single-sourcing comes about—will know the value of getting this right. I will be interested in probing this and perhaps trying to get the Government to go somewhat further. At the moment the Bill seems to be written around a price mechanism, which will be a cost, an overhead and a profit. The mechanisms that are being brought forward to improve this are, principally—I think that this was in the Minister’s speech—transparency. The objective is to improve the balance between value for money for the taxpayer and reasonable profits for the supplier. We entirely accept that; we are not against suppliers making profits, as suppliers that do not do so do not continue to exist. There has to be that balance.

The process is to have the force of law in many areas. This is good. Indeed, the gains claimed for it are modest; they could be significantly higher. However, there will be questions about what transparency means and how confidentiality and IP are going to be protected. There is a real issue about information that flows about between groups, where one group is deemed to be a single-source supplier while another is perhaps trading in the international civil world.

We need to look carefully at the SSRO, and particularly at its independence. Creating independent bodies is a very difficult thing to do, as is actually creating some way of being sure that government influence is not there all the time. We will have to look at its independence, its balance and the reward structure for its directors—and, more importantly, at how we bring in the right talent. What is the appointment process going to be? What will be the quality of the people? What will its powers boil down to? I know that they are in the Bill, but they need to be picked over. Is it effectively an available arbitrator?

Should we go further? In my experience, people who have not been involved have a very silly idea about competition: they think that if you have real competition leading to a contract award, somehow you have solved the problem. Usually, 80% of the problem comes after the contract award. Things go wrong. Circumstances happen and change things. I have dealt with contracts for multiple hundreds of millions, and we have had so-called competition at the beginning; sometimes you are pushed to get two suppliers that are vaguely compliant in your bidding process, but you have your competition. However, you are then locked into a single-supplier situation. Can we think about how defence contracts that run on with a single-supplier situation can be brought into this area? What we need in this difficult area is more innovation so that we can go for more cost savings and can incentivise suppliers to improve—and they will feel that they are getting a fair deal and being properly rewarded.

Finally, on the reserves, we, of course, support a greater and more integrated role for the reserves, and the change of name. We note the logic that my noble friend touched on earlier: there will be a 20,000 reduction in full-time Army personnel. We hear that this is now planned and cannot be changed. We accept it, but bringing up the total number of Reserve Forces to 30,000 does not appear, initially at least, to be going well. We need regular reports. We look forward to the amendment that the Minister will be bringing forward in this area, but these reports have to go quite a long way further. We need to know not just about gross numbers but about where the skills are, how the training is going and what reduction in planning assumptions will result if we fail to recruit. What is the realistic capability of the Army if this recruitment does not take place, or if some of the problems, referred to by noble Lords, that reservists have when faced with the onerous burden of being in the reserve come to pass and we have difficulties?

Parts 2 and 3 are sensible pieces of legislation. We will have to pick them over, but they have lots of potential. The Government have wisely stepped back from the GOCO competition. They should now step back from trying to prosecute Part 1.

18:01

[Lord Astor of Hever]

My Lords, we have had a constructive and well informed debate on the Bill. I share the generous thoughts of the noble Baroness, Lady Dean, about Lord Gilbert. The debate has shown that there is a large degree of consensus on the need to reform the way in which we manage and deliver our defence capabilities. It is important that we provide our Armed Forces with the equipment and support they need and that we take the appropriate measures to ensure that the Reserve Forces can be used as part of the integrated Future Force structure with individual reserves appropriately protected in their role and their employers better rewarded for the contribution they make in supporting the Reserve Forces.

The measures set out in the Bill represent a real change to how the Ministry of Defence will conduct its business in future. They will allow us to ensure that equipment and capabilities are delivered on time, on budget and to the right specification.

At this point, I am going to cut short my speech as I have been bombarded with questions, and I will try to answer as many as I can tonight. There is no way I will be able to answer all of them, so I will write to all noble Lords who asked questions and copy in other speakers.

The noble Lord, Lord Rosser, and other noble Lords asked why Part 1 should remain if we are no longer proceeding with the GOCO. I am well aware of the mood of the House on this issue. We believe that a GOCO remains a potential future solution for transforming DE&S once we have put in place a more robust baseline from which to contract with a GOCO partner. It would therefore be prudent to have Part 1 in place should a future Administration decide to go the GOCO route. We very much hope that the new DE&S-plus organisation will be robust and successful. We should not be afraid of the competition that potentially testing the market for a GOCO in three to five years’ time would provide. Keeping the possibility of a GOCO would provide an incentive for a new organisation to maximise its performance.

The noble Lord also asked what “at a future date” means in relation to a possible future GOCO. We do not envisage reopening the GOCO option for at least two to three years, certainly not before the next election.

The noble Lord asked how much money has been spent on the GOCO commercial process and whether the Bechtel consortium will now make a claim against the MoD for the money it has spent on the bid. This was also asked by the noble Lord, Lord Davies. We have spent £7.4 million on supporting our work on the GOCO option. The money is not wasted. We have gained valuable insights from this work that have not only helped us understand the commercial landscape but will stand us in good stead for the new organisation. On Bechtel, we have always made it clear that we will not pay bid costs.

The noble Lord asked about the draw-down of regulars prior to build-up of reserves. We have had no choice but to reduce regulars to stay within the budget. The cost of 20,000 regulars is £1 billion a year. In line with the SDSR, there is a drawing down in some areas to build up in others, such as cyber, as the noble Lord knows. This is about doing defence differently.

[Lord Lee of Trafford]

My noble friend has just given an indication of the cost of the GOCO option so far. I draw his attention to a reply to a Written Question I had tabled:

“The Materiel Strategy programme is currently in the Assessment Phase and is considering two options … The Concept Phase of the programme started in May 2011 and analysed a number of different operating models. It concluded with the approval of the Initial Gate Business Case in April 2013 and cost £12 million. The Assessment Phase is currently developing both DE&S+ and GOCO options”.—[Official Report, 18/11/13; col. WA135.]

Perhaps my noble friend might like to look at that.

[Lord Astor of Hever]

My Lords, when I come to answer my noble friend’s questions, I will touch on the assessment phase and come up with some figures which may be helpful to him.

The noble Lord, Lord Rosser, asked for the latest update on recruiting. The quarterly personnel report of 14 November had trained and untrained strength of reserves, inflow and outflow. The Secretary of State will publish recruitment targets before the end of the year. The noble Lord asked about Capita recruitment. We have been very open about the fact that there have been teething problems. The Army and Capita are fixing these. The new website will be up and running in January, and there will be a faster recruitment pipeline. Temporary adjustments have been made to applications to ensure that we continue to progress new recruits. We want to cut out any blockages there.

The noble Lord, Lord Levene, suggested that we stop running down the abilities of civil servants. I agree with the noble Lord and pay tribute to those civil servants in the MoD, who certainly give me excellent advice. The noble Lord asked for a definition of the difference between DE&S and DE&S-plus. This is quite complicated, and I will write to the noble Lord and make sure that all other speakers get a copy of that.

The noble Lord and my noble friend Lord Lee asked why there was no competition for the chief executive post. The simple fact is that the CDM has an extant contract that takes us past 1 April, when the new trading entity will stand up. His post as CDM will morph into the chief executive role. Furthermore, realistically, there would have been no chance of selecting and appointing anyone else in time for them to stand up the new organisation on 1 April. He will also provide a vital thread of continuity from the Gray report into the continuing reform agenda.

Going back to the note that I said that I would write to the noble Lord, I will undertake to do that before the Bill moves into Committee. The note will set out the different models.

The DE&S civilian staff will remain civil servants—a point that the noble Lord raised. Their status will not change. Members of the Armed Forces will continue to make a valuable contribution in DE&S as they do today. We will be able to create a more businesslike organisation which is better able to recruit, reward, retain and manage its staff. In terms of recruiting, we will be using private sector expertise to help DE&S-plus get match-fit, including in terms of its HR transformation.

My noble friend Lord King mentioned the deferral of mobilisation. It is already possible for a reservist or their employer to ask for mobilisation to be deferred. For an employer, one of the criteria for deferral is the impact that mobilisation would have on the business.

I am glad that my noble friend Lady Garden mentioned the cadet debate of a couple of weeks ago. I listened to some of the speeches in this Chamber and was most impressed. I will write to my noble friend about careers advice for cadets. She asked whether there was any skills audit of current DE&S staff. The answer is no, but we undertook a detailed assessment of DE&S business capabilities in the early part of the materiel strategy, which looked at the issue of skills.

The noble and gallant Lord, Lord Stirrup, pointed out that we must focus not just on a single factor as we reform DE&S. We recognise the complexity of defence acquisition, and will continue to do so.

The noble Baroness, Lady Dean, asked about the proportion of regulars recruited to reserves. There are incentives for ex-regulars to join reserves. Those who leave the Army through redundancy are being encouraged to consider a part-time military career in the reserves. For the Army, ex-regulars who enlist into the Army Reserve within three years of leaving regular service can enjoy a number of incentives and benefits, such as reduced Army Reserve commitment and training requirements or, alternatively, a commitment bonus worth £5,000 paid over four years. There is a comprehensive information campaign to ensure that all service leavers, not just redundees, are aware of the opportunities and benefits of joining the reserves.

The noble Baroness asked who is running recruitment; it is Capita, which is working closely with the Army to fix the teething problems. She asked whether tranche 4 redundancies were to be paused. No final decision has been taken on that. Also on the regular to reserve transfer, 459 applications have been made to the commitment bonus scheme, of which 316 were from ex-regular other ranks, 35 from ex-regular junior officers and 108 from direct entry—that is, not ex-regular—junior officers. I understand that this is quite complicated, and I shall write to the noble Baroness and set it all out, copying in other noble Lords.

The noble Baroness asked whether having the legislation in Part 1 would not be a sword of Damocles over the DE&S-plus option. No, we do not see it like that at all. We are constantly striving to improve performance. The innovative structure will move us forward, but the underpinning rationale for a GOCO remains in place and could represent a further evolutionary step. Part 1 being in place will not mean that we have to proceed with a GOCO in future, but it will keep the option open.

My noble friend Lord Lee asked a number of questions. He asked whether a GOCO was the department’s favoured option. When the Secretary of State announced the materiel strategy proposals in June, he was explicit in saying,

“we have not yet accepted the GoCo concept as the chosen outcome; we are conducting an assessment”.—[Official Report, Commons, 10/6/13; col. 54.]

My noble friend asked, as did the noble Lord, Lord West, whether Bernard Gray would resign. No, there is no need for that; what matters is that we drive forward the reform of DE&S. Bernard Gray will do that as chief executive of the new organisation.

My noble friend asked whether the chairman of the new organisation’s board would be executive or non-executive. The answer is non-executive; we will have strong oversight of the new organisation. We were asked how we would recruit the new people. We will use the private sector expertise that we plan to bring in through business partner contracts to help us to deliver a transformed HR. This will include getting the best out of freedoms that we have agreed with Her Majesty’s Treasury and the Cabinet Office, which are necessary for the new DE&S.

My noble friend mentioned Her Majesty’s Treasury. We have agreed with the Treasury and, indeed, the Cabinet Office that we must have freedom to be able to operate effectively. We are confident that we will get these. It is one of the reasons that we are setting this up as a bespoke entity. How much have we spent so far on this? I gave the figure of £7.4 million to the noble Lord, Lord Rosser. We have spent some £17.8 million on the assessment phase of this complex change programme to determine the best way to deliver what we need. This investment, which excludes the cost of MoD staff, has included work on the GOCO, the DE&S-plus option, and on the necessary changes to the customer.

My noble friend asked how much we have spent on consultants. The MoD spent £68 million on consultants in 2012-13. Going back to the freedoms, we do not yet know details of these, but they will be significant. Her Majesty’s Treasury recognises the need for significant freedoms around salary for DE&S-plus. I will write to my noble friend when I have more information. This is obviously a very important issue and I will copy in other noble Lords on it.

My noble friend asked about Bernard Gray’s salary, as did the noble Lord, Lord Davies. I understand that Bernard Gray will continue on his existing terms, but I cannot confirm that today. His current salary is around £220,000 per annum. My noble friend asked whether the potential GOCO competition would make it harder to recruit from the private sector. This is simply not the case. Those we are trying to recruit would see GOCO as an opportunity, not a threat.

The noble and gallant Lord, Lord Craig, asked about ministerial notification and early availability. It is important that Ministers oversee a call-out. We will seek to provide employers with as much notice as possible and arrangements already exist for high-readiness reserves who can be mobilised at short notice. I will write to the noble and gallant Lord on this issue.

My noble friend Lady Doocey asked about mental health and housing. I have very detailed answers but, rather than test the patience of the House tonight, I will write to my noble friend on those matters. I have a very full answer that I think she will be happy with.

The noble Lord, Lord Davies, made a very political speech and asked whether the potential GOCO contract would make it hard to recruit from the private sector, as did my noble friend Lord Lee. We do not believe that is the case. The people we are trying to recruit would see GOCO as an opportunity, not a threat. The noble Lord asked whether there was a special deal for Bernard Gray. His role will continue beyond 1 April on his existing terms and conditions. He provides a vital link between the work done so far and the new organisation.

The noble Lord, Lord Tunnicliffe, gave me sight of his questions. I can confirm that legislation is not required to establish the bespoke entity that we announced today. However, legislation is required to establish an effective GOCO and that remains a possible future option. If we do not have the legislation in place then, that could inhibit a future competition.

We still have to work out the detail of specific freedoms and authorities. However, as I said, the Treasury and the Cabinet Office have been working with us to ensure that this innovative structure will be permitted significant freedoms and flexibilities. I have already undertaken to write to noble Lords on this very important issue.

DE&S civilian staff will remain civil servants—their status will not change—and members of the Armed Forces will continue to make a contribution to DE&S, as they do today. We will be able to create a more businesslike organisation which is better able to recruit, reward, retain and manage its staff.

The Bill provides the legislation we need to make far-reaching changes to the way in which we deliver our defence capabilities. The changes set out will not only improve the support we give to our Armed Forces but make specific improvements for reservists and their employers, who are an integral partner in enabling the Reserve Forces. The measures in the Bill will also help to ensure that the taxpayer gets value for money. We must not miss this opportunity to make essential changes to the way we manage and deliver defence in the future. I therefore commend the Bill to the House.

Bill read a second time and committed to a Grand Committee.

House adjourned at 6.20 pm.