Defence Reform Bill

Debate between Lord Davies of Stamford and Lord Craig of Radley

Monday 3rd February 2014 Grand Committee

[Lord Craig of Radley (CB)]

My Lords, I shall speak briefly to the amendments. I look at the matter from the point of view of the user, the Armed Forces, and what is in it for them.

Nowadays, the Armed Forces will have much more say over the amount of money that may be spent on their equipment, and therefore they may take more of an interest in the detail of the procurement side than was true in my day. Nevertheless, it is important that they have confidence that whatever system is going to procure their equipment has general support throughout the country and throughout government. At the moment we have two propositions, neither of which seems to be making good headway. The GOCO has certainly made no headway and it remains to be seen how well the DE&S+ will go—I even have doubts about that—but, of the two, I prefer it the GOCO.

However, dealing with the amendments, I find a good deal of attraction in Amendment 25. It brings the super-affirmative approach to the issue and is the one that I would favour.

[Lord Davies of Stamford (Lab)]

My Lords, I was the last defence procurement Minister in the previous Government. It is too early to make definitive judgments about how well-based were the projects for which I was responsible because some of them were quite long term. As far as I know, most of them are doing well and are on track and on time. They include the A400M, the Typhoon Tranche 3, the Chinook contract—where the Government, sadly, cut the numbers from 22 to 12 —the Puma upgrade, the Scout vehicle and so on.

However, I inherited a number of contracts which were the subject of substantial cost and time overruns. They were originally signed in the late 1990s. I will not make party-political points by saying exactly when they were signed now because otherwise you will think that I am making a party-political speech, which I certainly do not intend to do. Those errors were based on a fundamental mistake, which is to think that there is one simple formula for defence procurement. There have been arguments for many years, for generations, about whether you should have cost plus, competition or fixed-price contracts. The answer is that all these formulas are appropriate in certain circumstances. However, the great mistakes were made on projects such as Astute and Nimrod, which involved new technology and new developments—a new generation of reconnaissance aircraft in one case and hunter-killer submarines in the other.

It was a fundamental mistake to think that those procurements could be conducted on a fixed price because, when you are at the frontiers of technology—I said this on Second Reading—by definition you do not know what problems you are going to encounter and how much time and money will be needed to resolve them. If you ask a contractor to come up with a fixed price it will either be crazily high to cover all possible risks to himself or, more likely, if he thinks that being a national provider he is going to get the contract anyway, he will come up with an unrealistically low price, knowing that he can renegotiate more favourable terms once the Government and the MOD are committed to that contract because ultimately the Government have to have that capability delivered.

That is the phenomenon we suffered from with those two disastrously-conceived projects, although the capability was absolutely necessary. It was a great mistake for the Government to get rid of the MRA4 when they came into power. The Astute programme has continued and is delivering results, and I am very glad about that. The MRA4, however, was a great error. If you have a first of class of a major aircraft or naval vessel—a major platform—an absolute rule is that that is inevitably going to be a prototype. You cannot actually call it a prototype because you cannot build a combat aircraft for £100 million, or a Type 45 destroyer for £1 billion, or an Astute class submarine for £1.2 billion or £1.5 billion and then throw it away. So it is not going to be a prototype.

You are going to make some mistakes in building it the first time round. You will need to make amendments and changes which you had not originally foreseen and these will all add to costs and time. The only solution is to have a version of cost plus during that period for the first of class. Subsequently, when you have an idea of the technical issues and have resolved them, you can refine the thing down and ask for a fixed price. It must be a sophisticated version of cost plus and the formula that I found most useful—we have got it now for the Astute programme—is a target price with an incentive for coming in under the target price; a share of the over-run if it is above the target price; and a completely open book policy so that there is a genuine sense of teamwork between customer and supplier. Those formulas can work. One has to be quite flexible about this and not believe that there is some perfect, platonic solution to defence procurement.