Fourth Standing Committee
on Delegated Legislation
Tuesday 26 February 2002
[Mr. John Butterfill in the Chair]
Draft ABRO Trading Fund Order 2002
The Minister of State for Defence (Mr. Adam Ingram): I beg to move,
That the Committee has considered the draft ABRO Trading Fund Order 2002.
ABRO, formerly known as the Army Base Repair Organisation, was established as a defence agency on 1 April 1993. It currently employs about 2,700 industrial and non-industrial civilian staff at its Andover headquarters and its eight workshops across the United Kingdom. ABRO provides a comprehensive engineering and logistics support service, principally repair and maintenance, for the land-based equipment of Her Majesty's armed forces. The work ranges from the complete overhaul and modification of major military vehicles to upgrades of radios and weapons. Nearly 375,000 such tasks were completed in the year ending September 2001, and ABRO has a spares-inclusive resource budget of about £144 million.
The strategic defence review, which was reported to Parliament in July 1998, confirmed the need to retain a capability for such equipment support in the Ministry of Defence. It further concluded that ABRO should
''be restructured with a view to its becoming a trading fund.''
Those conclusions remain valid.
Trading fund status offers ABRO and the MOD a number of recognised benefits. Those include greater management flexibility, a freedom to match receipts to expenditure, pricing flexibility, the ability to establish reserves and the improved use of working capital. As a trading fund, ABRO will move on to a more commercial footing. It will be subject to greater competitive pressure through greater exposure to market forces.
The trading fund will improve both the efficiency and the effectiveness of ABRO's operations. It will significantly enhance the ability of the chief executive to innovate and develop the agency's business and to drive cultural changes in ABRO and among its Ministry of Defence customers and suppliers. Of course, ABRO's major customer is the Defence Logistics Organisation, whose business accounts for about 95 per cent. of its output.
As with the Defence Aviation and Repair Agency, which was set up as a trading agency 12 months ago, establishing ABRO as a trading fund will contribute towards the chief of defence logistics' strategic goal to reduce the output costs of the DLO while maintaining or improving the quality of the services that it
Column Number: 4
provides. The business case for the trading fund is that it projects a net resource saving for the MOD of around £50 million over the first five years of trading.
As a trading fund, ABRO will earn its revenue directly from its customers and will have to pay for all the services that it receives. Trading profits will normally be paid as dividends or used to reduce MOD prices, or they may be re-invested in the business to achieve greater efficiencies. I am convinced that we need the disciplines of a commercial operation not only to increase efficiency but to drive the business forward.
ABRO will launch as a trading fund on a spares-inclusive basis, which means that the customer will have full visibility of ABRO's prices, including the costs of labour, spares and overheads. That will enable customers to select only those ABRO services that offer value for money. It will also transfer the risk associated with buying spares from the MOD as the customer to ABRO as the repair supplier.
Michael Fabricant (Lichfield): The Minister talked about the transparency of costing to clients of ABRO. Does that mean that clients will continue to be allowed to go into the commercial market to seek alternative prices and services?
Mr. Ingram: If the hon. Gentleman lets me develop my explanation of the trading fund, I shall cover the full gamut of the trading fund's operations and how it will impact on the MOD and its competitors as customers.
Another key issue is the fundamental shift in defence procurement resulting from another SDR initiative, smart acquisition. Smart acquisition places a growing emphasis on whole-life support solutions that involve MOD in-house support capability and industry.
If ABRO is to prosper as a trading fund, it will need to develop innovative support solutions and establish new working arrangements with the private sector. It is therefore firmly part of my strategy for ABRO as a trading fund for it to enter into teaming and sub-contractual arrangements with original equipment manufacturers and others, when that does not preclude fair competition and is to the Ministry's overall advantage. An example of that already occurring is ABRO's gaining of the sub-contract from Heckler and Koch for modification work on the SA80 rifle. In addition, ABRO has recently signed partnering agreements, which are agreements to talk rather than firm commitments, with two major original equipment manufacturersVickers on the Challenger tank programme and Alvis on the Warrior combat vehicle reconnaissance (tracked) programmes.
I am determined that ABRO should compete in the marketplace on a fair and open basis. With that in mind, I have decided that the agency will not receive a contracted and guaranteed order book. That said, I recognise that, largely, the current arrangements will continue in the early years of trading. However, ABRO's customer integrated project team leaders have been given a minimum requirement to reduce the element of the overall programme load provided to ABRO without competition from its current level of 60
Column Number: 5
per cent. to between 45 and 50 per cent. within three years of trading. That may answer the hon. Gentleman's question on the way in which ABRO will operate.
I am equally conscious of the need to retain the flexibility that ownership of ABRO by my Ministry provides, with particular reference to surge capacity and the ability to respond to short-notice requirements. As we have seen from recent events, such capabilities are even more valid in the current work environment.
Mr. James Gray (North Wiltshire): The Minister mentions the importance of maintaining surge capabilities. How does he then explain his written answer to my hon. Friend the Member for New Forest, West (Mr. Swayne) yesterday, which stated:
''The Army Base Repair Organisation (ABRO) does not maintain dedicated surge capacity for any specific equipments''?[Official Report, 25 February 2002; Vol. 380, c. 695W.]
Mr. Ingram: ABRO is not constructed on that basis, as it will take on various contracts. If a surge capacity is needed, it will transfer the work load to that identified by the Ministry of Defence. It is not a dedicated surge capability in the specific sense in which the question was askeda work force who stand by, waiting for a surgebut is currently employed on other activities. If it goes out into the commercial sector and takes on a commercial contract, its customer would be advised that there was a possibilitya probability at some point in future, I imaginethat those working on the contract could be transferred to a surge demand.
That demand could be of any sort, from the most extreme example of an outbreak of a major war between this country and another, to something far short of that. What I have explained is not inconsistent with my answer. In one sense, the whole of ABRO is a dedicated surge capacity, because all of it could be transferred if the need so arose. The hon. Gentleman looks quizzical, so he may want to raise another question.
Mr. Gray: My face is obviously much too expressive, but I am grateful to the Minister none the less for responding to the wiggling of my eyebrows. It seems odd to imagine how an organisation that presumably will be reasonably fully employed during peacetime could be expected to provide a surge capacity in times of war or tension.
Mr. Ingram: The hon. Gentleman misunderstands the way in which ABRO operates. Surge can come in any shape or form and any volume, depending on where demand lies. Let me give an example. Let us say that ABRO was working on Challenger II tank upgrades or modifications, and that there was then a requirement, for whatever reason, to increase work on Warriors, so the work force who were working on Challenger were put to work on Warrior, and the competencies of the work force allowed them to make such a transfer. That must be included in the process, but it will not change the trading fund approach. The only change, hopefully, will be in increased
Column Number: 6
commercial activity by ABRO. The probability of such a demand at some point must be known to the commercial customer, so that it would be conditioned to accept that result. I hope that that is an adequate explanation. The hon. Gentleman's quizzical eyebrows are not going up and down at the moment, so I assume that he now understands.
Military surge capacity is safeguarded by both the diversity of the MOD work placed with ABRO and the working regime employed by the agency. In practice, in the event of a crisis or other surge requirement, the Director General Equipment Support (Land) and ABRO will jointly agree to rebalance the priorities in ABRO's overall MOD programme. The arrangements are clearly laid down in the terms of the business agreement that governs the trading relationship between the Ministry of Defence and ABRO. The ABRO ministerial advisory board, which I chair, will provide strategic control to ensure that my Department's aims are met, especially in times of crisis, while ABRO develops along more efficient and competitive commercial lines. I have set out some examples of how that could work.
Although ABRO's trading fund business case is not predicated on winning major commercial sales, I am confident that a more efficient and competitive ABRO can both retain its market share and develop and secure new commercial opportunities. Targets for future years are being discussed and will be finalised before launch. Additional commercial successes will further reduce the share of ABRO fixed costs charged to my Department. ABRO will, of course, be set demanding annual key targets to ensure that it delivers year-on-year performance improvements in that and all the other critical areas of its business. Those will be monitored by my advisory board.
In order to establish ABRO as a trading fund, the Ministry of Defence will vest the existing agency assets with ABRO. I reassure hon. Members that ABRO's strategy is to retain all its existing occupied sites. In addition, the Ministry of Defence will provide up to £16 million to assist the move to trading fund status, a £15 million repayable cash loan and capital funding totalling some £3 million over each of the first two years of trading. In addition to that, the Department and the Treasury have agreed to waive the dividend requirement for the first three years of trading.
As a trading fund, ABRO will remain firmly part of the MOD, and my right hon. Friend the Secretary of State for Defence will ultimately own the assets vested in it. The chief executive of ABRO will be appointed by the Treasury as accounting officer of the trading fund, and will be personally accountable to the House for the fund's operation. The agency's annual reports and accounts will continue to be laid before the House.
As ABRO will remain part of the MOD, its industrial and non-industrial employees will continue to be MOD civil servants. The anticipated reduction in MOD work load, together with improved efficiency, could lead to some reduction in staff. That can be assessed only when ABRO's success in competing for commercial work is clearer. If a need for reduction becomes apparent, ABRO would intend to use natural
Column Number: 7
wastage as far as possible. Voluntary redundancy may be needed if sufficient commercial work cannot be found. All staff have been briefed on the plan and formal consultations will be entered into as and when required. The agency's commitment to training and personal development will naturally continue as a crucial part of increasing its business success.
The chief executive and his staff have engaged in regular dialogue and correspondence with the agency's six recognised trade unions. That has included regular consultation by ABRO and updates on the progress with the trading fund, which the trade unions have generally endorsed. The trade unions have also been formally consulted on the draft framework documentthe statement that my Department issues to provide ABRO with its operating framework to support trading.
ABRO's Ministry of Defence customers, which, as I said, account for more than 95 per cent. of ABRO's work, have also been fully engaged in the programme to move the agency to trading fund status through a period of shadow trading. In addition, I have responded in full to a number of questions about the trading fund initiative tabled by the Defence Committee. The chief executive of ABRO has also invited constituency MPs to visit ABRO sites for discussion. I would encourage such engagement, given the number of such sites throughout the country.
I believe that there is a compelling and robust case for establishing ABRO as a trading fund on 1 April 2002. It will enable both ABRO and my Department to realise a broad range of tangible benefits, while safeguarding any aspects of ABRO's business that are currently essential to the conduct of MOD equipment support capability. My right hon. Friends the Secretary of State for Defence and the Chief Secretary to the Treasury agree that it would be in the interests of the improved efficiency and effectiveness of ABRO for its operations to be financed by means of a trading fund. I therefore commend the order to the Committee.