Sixth Standing Committee on Delegated Legislation
Monday 19 March 2001
[Mr. Eddie O'Hara in the Chair]
Draft Defence Aviation Repair Agency Trading Fund Order 2001
4.30 pm
The Minister for the Armed Forces (Mr. John Spellar): I beg to move,
That the Committee has considered the Draft Defence Aviation Repair Agency Trading Fund Order 2001.
The Defence Aviation Repair Agency, which was established as a defence agency on 1 April 1999, employs—as at 31 December 2001—5,564 people, of whom 4,740 are civilians and 824 are service personnel. They are based at four sites: St. Athan in South Wales, Sealand on Deeside, Fleetlands in Gosport and Almondbank near Perth. DARA has an annual full cost turnover of approximately £240 million and provides strategic in-house deep repair, maintenance, modification and overhaul capability for aircraft and aerosystems of the UK armed forces, as well as other logistic support services.
The Ministers who announced the creation of DARA in the strategic defence review 1998 stated their intention to convert it to a trading fund as soon as practicable. As an on-vote agency, its direct expenditure and receipts are subject to parliamentary vote and annuality of financial provision. Its investment decisions are constrained by the availability of annual funds and competing defence priorities, rather than being related directly to customers' needs. Furthermore, the current budget structures give an unclear view of the total cost of providing capability or unit prices to the customer.
The move to trading fund status will untie DARA from that funding regime. It will earn its revenue directly from its customers and can retain any surpluses to meet required investment. Most importantly, trading will increase price visibility, which will enable customers to select services that offer value for money and will facilitate robust competition where that benefits the MOD. [Interruption.] I note the Opposition spokesman's point that it would be helpful if officials were in the appropriate place—although we should not recognise their presence—where they would be proximate to the Minister should the skilful probing of the Opposition spokesman require their presence. Indeed, the usual channels may be facilitating that as we speak.
The formation of DARA from two existing agencies—the RAF Maintenance Group and the Naval Aircraft Repair Organisation—has already delivered considerable benefits. It has moved from a site-based to a product-based organisation and initiated a wide-ranging enterprise transformation programme, which includes commercial capability development, a new pay and grading scheme and a range of supply chain improvements. As an example of process acceleration, the DARA has reduced the turnaround time for Lynx helicopter transmissions from 52 weeks to two weeks. Similar improvements are being applied to a range of products and those measures have prepared the ground for trading fund operation. However, greater benefits will be unlocked as a result of moving to a trading fund.
The trading fund is not an end in itself, but a step along the road to greater efficiency in logistic support. In particular, it will enhance the ability of DARA management—within the framework of departmental scrutiny—to innovate and develop the agency's business and drive cultural changes in both DARA and its MOD customers. That will provide a powerful incentive to increase efficiency, and I am convinced that we need the disciplines of commercial operation to drive the business forward. DARA will be set demanding annual key targets to ensure it delivers year-on-year performance improvements.
The strategy adopted for DARA must be consistent with and complement the broader departmental approach to support. DARA is currently part of the Defence Logistics Organisation, and when it is established as a trading fund, the chief of defence logistics—the CDL—will remain its principal customer. The DLO was established in the defence review to rationalise the previous complex and resource-intensive support structures across the Department. Considerable progress is being made. The CDL has set an ambitious target of reducing DLO output costs by 20 per cent. by 2005, while maintaining or improving the quality of the services that it provides to its customers. Efficiencies that flow from establishing DARA as a trading fund will contribute to achieving that strategic goal.
Also central to the future of repair is the fundamental shift across defence procurement as a result of the SMART acquisition initiative. We are looking for whole-life support solutions and a more constructive relationship with industry based on partnering, common goals and gain-sharing, underpinned by competitive contractor selection wherever that provides best value for money. I am therefore actively encouraging DARA to develop innovative support solutions and, where advantageous to the Department, to establish new working arrangements with the private sector. For example, on 31 October last year DARA signed a strategic partnering arrangement with Rolls-Royce for integrated logistic support for military engines. That arrangement will create benefits in repair and overhaul costs, product reliability, repair turn-round times and spares provisioning. A recent partnering arrangement between DARA and Hamilton-Sundstrand offered a total support package for essential Tornado components, which has significantly improved front-line availability.
To help DARA establish itself in the competitive environment, the Treasury has agreed to waive the dividend from the first five years of trading. After an initial three-year allocation of work to provide DARA with the stability necessary to commence trading fund operation, the Department will compete as much as possible in terms of the repair and overhaul work that it currently places with DARA. I am confident that a more efficient and competitive DARA can retain its market share and, in the medium term, be well placed to secure new opportunities. Trading will commence on a spares exclusive basis, but we intend to move progressively to spares inclusive trading with DARA as soon as possible, in keeping with our broader shift to inclusive trading arrangements with industry.
When DARA moves to a trading fund on 1 April, the chief executive will be responsible to my right hon. Friend the Secretary of State for Defence for the performance of the agency. He will be also be appointed by the Treasury as accounting officer for the trading fund and, as such, will be answerable for its operation and accountable to the House of Commons. The agency's annual reports and accounts will continue to be laid before the House. The assets of the fund will remain vested in my right hon. Friend, and civilian employees of the agency will remain civil servants.
DARA's internal MOD customers, who make up about 90 per cent. of its turnover, have been fully involved in the programme to move DARA to a trading fund organisation. Furthermore, the chief executive of DARA and I have consulted widely and discussions have been held with, among others, the Select Committee on Defence, local Members of Parliament, trade unions, the Executive of the Scottish Parliament, the Executive of the National Assembly for Wales, the Welsh Development Agency and trade associations. I pay particular tribute to the constructive approach that was taken by trade unions, both at national and local level.
We are satisfied that the change in regime will bring important benefits in terms of efficiencies, while improving the level of service to the agency's customers and ensuring a good and sustainable working environment for DARA's most valuable asset—its skilled work force. My right hon. Friend the Secretary of State for Defence has concluded, and my right hon. Friend the Chief Secretary has agreed, that it would be in the interests of the improved efficiency and effectiveness of the management of DARA for its operations to be financed by means of a trading fund.
4.39 pm
Mr. Robert Key (Salisbury): I am glad that the Minister has his full complement of assistance, should the need arise. Having spent much of the weekend preparing for the Committee and come up with several questions about the order, I was blowed if I was going to be put a position whereby, should the Minister's memory fail him, there would not be anyone to answer them. I am therefore glad to see that things are back to normal.
Before Christmas, I visited Cardiff to speak to a reserve forces dinner in Cardiff castle. A programme on local Welsh television that night had a long section about the future of DARA, and St. Athan in particular, which made me aware that today's debate would be important and that the business under discussion would present some difficulties.
The 5,564 people who are employed at the DARA must realise that today's business is not a great debate in which the Committee can say yes or no to the order. Given the procedure of the House of Commons, we are here simply to say that we have considered the statutory instrument. We are not in a position to say whether we agree with it. However, as the Minister said, the move to a trading fund is just a step along the road. The difficulty for our party is that we do not know where that road is going. I suspect that the Minister does not either. The processes have not yet been completed, as evidence to the Select Committee made clear.
The Minister made important comments, for example, about partnership arrangements and gain sharing, to which no one could take exception. Motherhood and apple pie are the words that spring to mind. The Treasury has declared that it will waive its dividend for five years, but if the Treasury thinks that something is a good idea, some of us might think that there is something up.
On the other hand, as the Minister said, there has been wide consultation, in which the trade unions have been involved. I wrote to Mr. Jack Dromy of the Transport and General Workers Union, on 15 February, to ask whether he wished me to raise any points when the statutory instrument came before the House. As yet, I have received no answer. However, that may indicate that he feels that he has been consulted. We shall see whether that is so.
I had more than half expected to see the hon. Member for Vale of Glamorgan (Mr. Smith) in Committee. He has played a substantial role in the matter, as he wants to protect his constituents' interests. I saw him doing so on television, and he has asked significant questions about the order.
The Conservative party supports the Government's aim to increase efficiency in the Ministry of Defence. We agree that the merger of the naval aircraft repair organisation and the RAF maintenance organisation to form DARA was the best way to achieve that. Our major concern is that the MOD has not come up with a coherent strategy for DARA's future. Its plans for DARA's future do not take account of the need to retain strategic facilities despite a declining market for the repair and maintenance of aircraft.
There is also confusion about whether the MOD believes competition or partnering to be a better way to achieve efficiency savings for the DLO. The Society of British Aerospace Companies shares that concern.
We recognise that there is significant overcapacity in the repair and maintenance industry. The MOD hopes to use that overcapacity to achieve some of the efficiency savings demanded by the Treasury. Once DARA is established as a trading fund, it will have to compete directly with industry. However, great emphasis has also been placed on partnerships with industry. The MOD wants DARA to provide a competitive alternative to monopoly suppliers. That was expressed in the Defence Committee's excellent report, which was published on 7 March. On 14 February, Mr. Stephen Hill indicated his concerns to the Committee. His evidence to the Committee is contained in paragraph 55, which states:
``The Ministry of Defence in the form of DARA provides a competitive alternative to monopoly suppliers.''
That sounds fine. However, DARA is being encouraged to make public-private partnership arrangements with major aerospace organisations. Page 12 of DARA's latest corporate plan says:
``DARA will develop Public Private Partnership arrangements with major aerospace organisations to further grow the business, and to share best practice between interested parties.''
That creates a serious dilemma. On one hand, there is more competition; on the other, there is more cosying up. That debate is not limited to the future of DARA; it runs through other agencies such as the Defence Evaluation and Research Agency.
Hon. Members should consider the impact on employment at such sites. For example, will we see the closure of Almondbank or St. Athan? In the Defence Committee's evidence on 14 February, the Chairman asked Mr. Hill:
``So, say, if you vacated the St. Athan site it might be used by some other MOD user, or it could be surplus to requirements and sold off and, if so, the MOD will gain the money from the sale?''
Mr. Hill said:
``Yes indeed. There are a couple of other issues associated with staying at St Athan. Of course, DARA will be likely to become the only user of the airfield in which case we will have to bear all the overheads associated with operations. If we move to Cardiff Airport there is an alternative to share the costs with other users.''
Cost issues are involved in the future of that site, in that the overheads may have to be borne by DARA alone. That problem must be reconciled. What is the Ministry of Defence's approach? Is it encouraging competition, or partnering? We know that the Minister has consulted the industry about the future of DARA and we would like to know what was said by the industry about the apparent contradiction. How do the Government intend to retain competition in the aircraft repair and maintenance sector if the DLO seeks to achieve efficiency savings through long-term partnering?
Long-term partnering is another important issue. In the memorandum from the Ministry of Defence to the Defence Committee on 19 February, the MOD said under the heading, ``Winning new business'':
``Partnering is essential if the Defence Logistic Organisation (DLO) is to access the benefits of integrating spares and technical support into the repair and overhaul capabilities of DARA.''
The end of the paragraph states,
``It has established partnering agreements that are now delivering improved performance at reduced cost levels, and which provide the basis for DARA to secure access to these future markets.''
That seems to say, ``Having cosied up by making partnering arrangements, which have reduced costs, we will now see what happens in the marketplace.'' The Society of British Aerospace Companies will respond, ``Hang on. Is that fair competition in terms of this process?'' I want to draw that to the Minister's attention.
There is also the question of project Whirlwind, which formed an important part of the work of the Defence Committee. The 14 February memorandum from the Ministry of Defence explained that DARA and BAE Systems
``propose the creation of an equity based Joint Venture Company (JVC) in which DARA will have the majority of the issued share capital. The JVC will manage its owners' current and planned interests in the repair of defence aviation repairable spares, adding value by improving efficiency in the management of existing support chain logistics.''
That is all very well, but what safeguards has the Minister established in the new arrangement to stop the joint venture company acting in an anti-competitive way? I ask the Minister for a response to that important question. Private sector companies will need reassurance. To protect DARA during the change to trading fund status, the Defence Logistics Organisation is prepared to allocate 90 per cent. of MOD work to the new agency. The current figure is 50 per cent., so that constitutes a 40 per cent. increase. The statistic appears to have been plucked out of thin air. I assume that the work will be taken from the marketplace of the private sector. Once again, what is going on? On the one hand we have a market approach and on the other we are saying, ``We are going to fix it so that you can all have 90 per cent.'' I would be grateful if the Minister could square that circle.
We would also like to know what confidence the Minister has that the industry will continue to retain the capability for aircraft maintenance and repair during the three-year period of change. At present, DARA has a unique position in regard to access to intellectual property rights. There is always a problem with such arrangements, as we saw in the privatisation process of DERA. Its unique position means that DARA needs access to intellectual property rights to ensure that it can, in the words of page 5 of the corporate plan,
``Provide an intelligent customer service to tasking authorities''.
What consultations has the Minister had with industry over the exploitation of that intellectual property? That is important. Given the problem that we have seen with the division of intellectual property between the retained DERA and new DERA, we want to be sure that there is a similarly clear demarcation of intellectual property in relation to DARA.
Does the Minister think it reasonable that DARA should use intellectual property rights from potential competitors to further its own business? We once again face the problem of the private sector market solution bumping up against the intellectual property rights that have been developed over many years of operating as a Government agency. The industry will be far less happy to give DARA access to IPR when, in a few years' time, the agency becomes a direct competitor. What will happen to the intellectual property? What arrangements have been made for that? [Interruption.]
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