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I think it fair to identify four phases in the history of defence procurement in recent times. The standard cost-plus model was universal in the world until the 1980s, but economically it was clearly an extremely wasteful and damaging process. The defence industry had no incentive to keep its costs down, unlike any industry operating in normal market conditions. Ultimately that is very bad for an industry, because it prevents it from becoming as efficient and innovative as it should be.

We took the first steps in moving away from that model under Peter Levene, now Lord Levene, when he became chief of defence procurement. We moved to a competition-oriented model, with which we encountered great difficulties, because when major projects involve major technology risks, people are not prepared to quote a fixed price. That makes it necessary to return to a system of contractual arrangements under which much of the risk is taken by the procurer, who must do a deal at a very early stage with the supplier, and as a result it is not possible for competition to operate effectively.

We then moved to the smart procurement system, which we used until fairly recently. Its main aims were to prevent a confrontational relationship between the supplier and the purchaser, to ensure that one did not try to cheat the other, and to give an incentive for everyone with expertise and answers to bring them to the table. The insight was relevant, and there is no doubt that smart procurement has produced some great successes—along with some very difficult problems, some of which have been mentioned today. However, we have all found that it is not the whole answer, because it, too, does not allow us to benefit fully from competition. There is always a tendency to oppose the forming of an initial partnership solely with the prime contractor and favour letting in parts of the supply chain to gain the real benefit and the real ideas, and that means a diminishing of competition throughout the system.

Now we are moving to a system that was called DPA Forward, until the two agencies were merged. I think we will all be very interested to see how it works and what it consists of, but my view is that where smart procurement needs to be tweaked, modulated or reviewed, the main purpose should be to ensure that we can benefit more from competition. There are a number of problems, one of which is that there is a limited amount of competition within the frontiers of the United Kingdom. As some of my colleagues have pointed out, there is competition in shipbuilding, between companies such as Vosper Thornycroft and BAE Systems, and that is fine; but in some areas it is impossible to benefit from competition without going outside the United Kingdom.

In the United States it will almost always be possible to meet defence requirements by buying something off the shelf, but that would probably be the last contract that the buyer would ever let, because we would no longer have any capability of our own. Next time around we would be entirely dependent on an American supplier. Not only would we have no leverage in terms of price and normal commercial negotiations, but we might well find ourselves in precisely the difficulty that we have
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experienced with the joint strike fighter. We might not get the necessary technology, or the Americans might try to sell us something slightly sub-standard that did not involve the latest technology. We cannot put ourselves into such a position.

Unless someone has thought of a fifth route that has not occurred to me, there is only one alternative to that range of possibilities, with the difficulties that are attached to them. That is more competition within the European Union. It has been established for a long time that that would be desirable if it could be achieved, and there have been various attempts to achieve it. It is also generally recognised that the old system of joint procurement that was used for the Tornado was hopeless because it was based on the principle of juste retour, which means that every country that is part of the consortium involved must receive a proportion of procurement equivalent to the proportion of the funds that it contributed to the initial development and research costs. That was a very inefficient and anti-competitive system.

We then established OCCAR—the Organisation for Joint Armament Co-operation—a joint procurement agency based in Paris, which is another bureaucracy. I do not wish to run the agency down, for it has done some good work, but it has also experienced some problems. I do not think that the A400M, for instance, has been a brilliant success so far. That system does not strike me as ideal. It is very bureaucratic; it is not competition, or the use of markets.

We have a market—the single market—which has been outstandingly successful in every other area of economic activity that anyone cares to mention. Let me make a suggestion. I am not advocating this, because I do not know enough about it—I have not done enough of the homework to be sure that I want to advocate it—but I am sure that we ought to consider systematically an option that will no doubt shock a number of Opposition Members. I believe that we should consider simply getting rid of the special protection for the defence industry that exists in the single market legislation—I cannot remember which clause in the treaty contains it—and extend the single market, in the form of the public procurement directive, to defence procurement. We should make it the rule, not the exception, that when we have a defence procurement opportunity we entertain bids from countries throughout the European Union, on a reciprocal basis. Because of the legal and enforcement structures in the EU, everyone else would have to observe the same rules.

Of course there would be certain cases in which individual British companies thought they had lost out, but I am tempted to believe, at least on a preliminary basis—I stress that I am speaking on a preliminary basis—that we would be the net gainers. We have an enormous number of very successful businesses. Some of them are niche businesses—avionics businesses, for example—and some are producing larger platforms, but we benefit from considerable expertise. I also believe that, in practice, we are always slightly more inclined than most of our continental partners to be open-minded, liberal and in favour of open markets. In practice, we have opened our defence markets where other countries have not.

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A good example in the non-war-fighting area is roll-on/roll-off ferries. Two orders for those were placed with German yards and two were placed somewhere else in the European Union, possibly in the Netherlands—I cannot remember. There was probably some agitation among Scottish colleagues of mine when that happened, but so far it has been a one-way street.

As far as I know, no equivalent of the Defence Procurement Agency—or Defence Equipment and Support, as it is now called—or of the Ministry of Defence in any of our EU or NATO partners has placed orders for equipment for military purposes, let alone war-fighting equipment, in this country, except when no company in that country could provide the equipment. Thus there has been no competition at all in that direction, although we have engaged in some competition in procuring from the EU. That is a foolish situation in which to be—or, at least, it would be foolish of us to resist the idea of opening up the market completely, given the assurances provided by the treaty, the legislation, the European Court of Justice and the European Commission that such a change would be enforceable and that there would be a genuinely free market in defence equipment.

Let me make my final point, in the space of one minute—

Mr. Hoyle: Will my hon. Friend give way?

Mr. Davies: I cannot, because of the time. I hope that my hon. Friend will forgive me.

This is a very important matter. As has rightly been said by those on both Front Benches today, lives are at stake. If we can save money in defence procurement, we shall be able to buy more and better kit, we may be able to provide more training, and we shall be able to buy all sorts of support that our military personnel not only deserve but desperately need. Therefore, the overriding obligation in defence procurement is to ensure that we are being as efficient as possible, and that we do not get carried away by simple lobbying by defence suppliers to serve their own individual ends. The purpose of the operation is to provide what our military needs at the lowest price, to enable us to procure more. More competition is the way forward.

6.20 pm

Nick Harvey (North Devon) (LD): I welcome the Minister to his first debate in his new role. I appreciate that it is a difficult baptism for him; procurement is principally the responsibility of another Minister. However, we welcome him here today. Our debates are sometimes robust, but he will be relieved that, thus far at least, they have not been as robust as Mr. Jeremy Paxman can be when interviewing on “Newsnight”.

It is good that we have the opportunity today to have this debate about defence procurement. It comes at a time when there is increasing concern on the part of the public, the media, parliamentarians and the armed forces themselves about the critical degree of overstretch that we are experiencing. That takes its toll not only on the men and women who serve in the armed services, but, as has been said, on the equipment that they have in Iraq and Afghanistan, which in many
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cases is also suffering from overuse. In many cases, its life expectancy will be shortened as a result of the extra burdens placed upon it.

It is intriguing that we are having this debate on the same day that we have had the comprehensive spending review, confirming as it did the defence spending figures for the next three years. Having had the opportunity to look at those, we can see that, from this year, expenditure of £32.6 billion will go up over three years to £36.9 billion, an increase of £4.3 billion. The Government were spinning that in July as £7.7 billion. The hon. Member for Woodspring (Dr. Fox) and I have memories of such Government accounting from when we served our parties on health: increases in health spending were accounted in the same way.

As we have heard, it all boils down to an increase year on year averaging 1.5 per cent. above inflation. Incidentally, most of it, if we look closely, is in the third of the three years. For the first and second year, we will barely even keep up with inflation. That means that the pattern of increases that has obtained in recent years will continue. The message seems to be business as usual. In the light of the concerns that I alluded to a moment ago about the problems that overstretch is creating, I have to ask whether that is going to be good enough. When the Ministry of Defence looks at the settlements that some other Government Departments have been given, I think that it will breathe a sigh of relief, as things could have been even worse. However, when we look at the scale of the challenges, we will have to probe over the years how things are going to work.

The MOD has a real-terms increase. I welcome the priority that it is giving to certain areas: it has said this afternoon that it is going to pay more attention to the armed forces, armed forces welfare, housing and the conditions in which individual men and women are working. However, if it is going to do that sincerely, and I believe that it will, many of the programmes that we see looming on the horizon are going to stretch further to the right or to be scaled down.

Mr. Bob Ainsworth rose—

Nick Harvey: I see the Minister hovering and his arm coming out. I know what he is going to ask and I will give him the opportunity to do so. However, as the hon. Member for Woodspring said, we do not have laid out before us what is going to be spent and when. The Minister is going to ask me which things I do not want to be moved to the right. How can I possibly answer that when he does not give us the basic figures with which we could begin to make a case of that sort?

Mr. Ainsworth: The hon. Gentleman lays out the pressures and the difficulties. He is right: the question is extremely predictable but it still has to be asked. It is the same question that I asked the Conservatives. It is all right saying that an increase of 1.5 per cent. above inflation is not enough, but the pattern is a 10-year growth in spending on defence. If that is not enough, what would the Liberal Democrats commit to? It is no good him saying that he cannot see the figures. Of course, we can improve our scrutiny and all the rest of it, but what above that would the Liberal Democrats like us to spend?

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Nick Harvey: As I go through my remarks, I will look at the various procurements that are stretched out before us and we will have to address which of them are likely to be the casualties and what the implications of any delays and stretches to the right will be. Something or other has to give. The Government have not as yet cancelled any of the big procurements that we await. They have not as yet announced any downscaling of them. It is not simply the Liberal Democrats saying that we cannot get all that out of the budget on the scale that has been laid out. Many independent observers are making the same point, including the International Institute for Strategic Studies. From memory, Dr. Lee Willett, director of the Royal United Services Institute, was saying the same thing.

We already have a seriously overheated equipment plan. The costs—the military inflation—grow year on year, so we see a shift of those programmes to the right. They get delivered in stages, or—this is all too common—the numbers, the size and the capability get scaled back. Eventually, having been state-of-the-art technology at the outset, they arrive years out of date. A good example of that would be the Eurofighter or Typhoon programme, which from memory was signed off by John Nott when he was Secretary of State. It has only come into service in the past couple of years.

Dr. Fox: We accept that the Government are maintaining a permanent information advantage over Parliament. If the Government say that they are setting aside £5 billion for housing improvements or £110 million for new Mastiffs, we cannot tell whether they are squeezing other things out of the budget, because we do not know what the procurement figures are in which years. Only the Government know that. That is an example of the Executive maintaining an advantage over Parliament and Parliament therefore being unable properly to scrutinise the Executive.

Nick Harvey: I agree. I agree also with those who have said that proper parliamentary scrutiny could improve the procurement process. Some of the inherent flaws in that process contribute to the unfortunate outcomes to which I have referred.

In 1998, the Government conducted a strategic defence review. It is broadly correct to say that there was all-party consensus on its big-picture conclusions at that time and that that has continued, but the world has changed a great deal in that time. The events of 9/11 and their aftermath mean that the world that we are looking at now, that we are planning for in the years to come and for which procurements are to be prepared, is very different. The time is now overdue for another strategic defence review.

Some may groan at the thought of such a review but they have them regularly in the United States and at much shorter intervals—every four years—than in the UK. It is time that we undertook such a review again; it is overdue. Through such a review, we can decide which of the various procurement plans that are stretched out before us will be appropriate to meet the challenges that we will face. We must plan our procurement on the basis of the strategic environment that we face now and that we expect to face in the years to come. We must have a flexible response. Of course, we cannot
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anticipate what is around every corner, but a return to the baseline and having another look are long overdue.

Mr. Hoyle: Could the hon. Gentleman state clearly what his view is? He is very knowledgeable on defence and has a great vision for defence. Within that vision, does he support a further tranche of Typhoon? Does he support the workers in Lancashire?

Nick Harvey: The hon. Gentleman is asking me to put the cart before the horse, but if we are to have a strategic defence review and consider future requirements we must not pre-empt that by making assumptions beforehand. However, he knows that we have been sceptical about the matter raised, and that remains the case.

The urgent operational requirement—UOR—has undoubtedly frequently saved the day in Iraq and Afghanistan. However, the Treasury is now sabre rattling to the effect that it will not continue to bless the recent scale of procurement that has taken place through the UOR system, and there has been media comment that it is becoming a significant part of the procurement process. That further underlines the need both for a review of the strategic environment and for the overall planning methodology that we use for our procurement processes to be improved. We cannot continue to get away with plugging the gaps on such a scale through the UOR or a similar system. We have also heard warnings from within the armed forces.

Mr. Nicholas Soames (Mid-Sussex) (Con): Does the hon. Gentleman not accept that when a war is fought on two fronts, there is no alternative to a system such as the UOR because procurement requirements become urgent in the light of the circumstances faced by the troops on the ground? We will never be able to do away with the UOR; it is an important and effective part of the procurement system.

Nick Harvey: I certainly agree with that, and I have said that the UOR has been vital in saving the day on a number of occasions. I am not suggesting that the Treasury should be allowed to have its way, but I am simply flagging up a point that has already been made: that the Treasury appears to be getting agitated on this matter. I should also refer to various Defence Committee reports; it has repeatedly expressed worries that the MOD initial budgeting processes do not seem to be all that they should be, and that supplementary estimates are produced later. That is symptomatic of the same situation.

General Dannatt has also often stressed in speeches and remarks that the armed forces—specifically the Army in his case—are in desperate need of new procurements coming on stream, particularly FRES, the future rapid effect system, which we have heard about this afternoon. I welcome last week’s announcement, but trumpeting the fact that the announcement is two months early rather ignores the fact that it has taken nine years to get to where we are now. This particular announcement might have been two months early but, overall, it is running long behind the curve. FRES is undoubtedly very important, as are some of the other forthcoming procurements, and we can only hope that the budgetary restraint to which I
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have alluded will not have an impact on the FRES programme’s time scale or capability. I gather that the plan now is to get the first vehicles operational by 2012. That is welcome in the sense that the situation could have been a great deal worse, but there is a need here and now for this sort of generation of vehicles. The deployment of some Mastiffs is welcome; but, again, they are clearly plugging a gap. It is also hard to understand quite how the number of Mastiffs that is now being talked about will fit into the future overall inventory.

Dr. Andrew Murrison (Westbury) (Con): I am sure that the hon. Gentleman is aware that our indigenous defence industry is important to FRES and support for our troops in Iraq and Afghanistan, and I notice that his signature is absent from an early-day motion 2030 tabled in the names of his hon. Friends the Members for Colchester (Bob Russell) and for St. Ives (Andrew George). That motion would have the effect of imposing a windfall tax on our indigenous defence suppliers so will the hon. Member for North Devon (Nick Harvey) add his name to that? If not, what conversations will he be having with his hon. Friends?

Nick Harvey: I commend the hon. Gentleman on his sharp sight. I confess that I have not seen that early-day motion, but I will give it my attention and conduct the discussions he suggests after I have done so. I thank him for drawing it to my attention.

The Public Accounts Committee recently rightly raised concern about the MOD’s biggest weapon project running over-budget and falling increasingly behind schedule. To turn to a point made by the hon. Member for Grantham and Stamford (Mr. Davies), we must at all times be concerned about the waste of public money. It is essential to the troops that we get what they need to them as quickly as we can, but it is also essential to taxpayers that we drive a better bargain for their money than we have done on all too many occasions. The culture of delay that has developed over the years is not only to the detriment of the armed forces, but it also costs taxpayers dearly. The fact of the matter is that we end up spending more than we should, getting less for our money than we wanted, and getting it later than we should have done—and its capability is often not appropriate for modern circumstances and is a pale imitation of what was originally planned.

We know that the equipment situation in Afghanistan is dire. Reports have mentioned only half of the Apache helicopters working, only 70 per cent. of the Chinooks being available, only 16 of 96 promised armoured vehicles being delivered, engineers moving high explosives in soft-skinned trucks and soldiers having to buy their own kit as the Army provisions were below requirement and not fit for purpose. That is an unacceptable situation. [Interruption]. It is all very well for the hon. Member for Chorley (Mr. Hoyle) to say that that is not true, but serving members of the armed forces have talked to me and other Members about that—those serving members have said that that is their view. I appreciate that others have a different view, but I am simply relating to the House what members of the armed services have said directly to me.

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