Defence Reform Bill

Written evidence from the CBI (DR 06)

 

CBI evidence to the Defence Reform Bill Committee

 

1. The CBI is the UK’s leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.

2. The CBI welcomes the opportunity to provide evidence to MPs to inform legislative scrutiny of the Defence Reform Bill. The CBI’s membership includes businesses operating across the UK defence sector, from major contractors to small and medium-sized businesses in the supply chain.

Changes to defence procurement must not undermine the economic contribution of the UK defence sector and supply chain

3. CBI members support efforts to balance the defence budget while maintaining effective military capability, and believe that defence procurement reform has a crucial role to play in ensuring that the Armed Forces receive the equipment, support and technology they need at a value both the Government and taxpayers can afford.

4. At the same time, the UK defence sector is a truly world-class industry, supporting over 300,000 jobs in the supply chain and generating £8.8bn worth of exports for the UK economy in 2012. Therefore, the sector has the potential to make a significant contribution to securing private sector growth in the UK and supporting the Government’s wider efforts to rebalance the economy towards investment and trade.

5. It is crucial, therefore, that the legislation proposed in the Defence Reform Bill is carefully considered to avoid changes that might bring unpredictability and uncertainty for industry, particularly for SMEs, and which could have unintended consequences for suppliers in the UK defence market and their contribution to jobs and growth.

6. At present, CBI members are concerned that the Government’s proposed changes to defence procurement do not provide this certainty to businesses operating in the UK defence sector, and could undermine future commercial planning and investment decisions. The legislation should also include sufficient protection of commercially-sensitive information and intellectual property, as well as ensuring that suppliers receive a fair return for the risk they accept in defence contracts.

The Government should adopt a collaborative approach to defence procurement reform

7. The CBI believes the Government must commit to adopting a collaborative approach when introducing the proposed reforms to defence procurement, engaging in detailed dialogue with industry to ensure that the changes are implemented in a way that delivers improved efficiency and value for money, whilst eradicating costly delays and changes to programme specifications.

8. CBI members support the objectives of the Ministry of Defence’s (MoD) Transforming Defence Programme, so the interface with industry can be made more transparent, efficient and cost-effective. The Government is right to examine options for reforming the Defence Equipment and Support organisation (DE&S), as there is a clear need to inject greater financial and commercial skills into the management of major defence procurement projects, and partnering with the private sector could help to eradicate delays and deliver improved efficiency and value for money.

9. CBI members have identified some key metrics against which the reforms to DE&S should be assessed. These include:

o better value for money in defence procurement projects

o a reduction in the length and cost of bidding with simplified processes for bidders

o improved commercial skills and expertise which enable the MoD to become a more intelligent customer

o minimal disruption to planned defence procurements during the transition to the new DE&S operating model

o greater stability and visibility in the direction and funding of the defence equipment budget

10. The CBI takes an agnostic view as to the model for DE&S that is best placed to deliver these outcomes. However, our members consider it important that the Government consults closely with businesses operating across the UK defence industry to properly explain how the Government Owned Contractor Operated (GoCo) will work in practice and the benefits it will deliver for both the MoD and industry. This will enable businesses to make more informed judgements of the cost-effectiveness of the GoCo and its likely impact on their commercial operations in the UK.

11. At present, however, it is difficult for businesses to assess the viability and practicality of the GoCo operating model, particularly as there is a lack of information in the Bill with regards to the criteria against which the GoCo will be judged, and the Bill’s own impact assessment recognises there are substantial uncertainties over the level of costs and benefits associated with the GoCo model.

12. In addition, there is no mention in the legislation of the public sector comparator (‘DE&S+’), which creates further uncertainty within industry and prevents suppliers from analysing whether the DE&S+ model is a viable and cost-effective alternative to the GoCo.

13. Similarly, there is a lack of certainty for potential bidders as to whether the Government will proceed with the GoCo option following the competitive process, with bid consortia being asked to produce complex and costly bids with some probability that no contract will be awarded at the end of the process.

14. Irrespective of the DE&S operated model that is pursued, it is crucial that the Government ensures there are appropriate safeguards in place to protect suppliers’ intellectual property and commercially-sensitive information.

There are a number of outstanding concerns within industry that need to be addressed to achieve consensus on the new framework for single source defence acquisition

15. As one of the parties to the existing Yellow Book arrangements, the CBI supported Lord Currie’s Independent Review of the pricing regulations governing single source defence contracts. The CBI responded to the Government’s consultation in January 2012, highlighting a number of issues which required further consultation with industry in order to achieve mutual agreement on the transition to a new single source framework.

16. We have consistently argued there are clear advantages in the Government achieving consensus with industry on reforms to single source defence acquisition rather than imposing changes through legislation. That is why the CBI welcomed the Government’s commitment to engage in further discussions with ‘top ten’ single source suppliers, following the conclusion of the formal consultation period, through the creation of a sub-group of the Defence Suppliers Forum.

17. While progress has been made in many areas, there remains a need for further dialogue between the MoD and industry to achieve a robust and workable single source framework, which delivers on the objective to drive greater efficiency and value for money from non-competitive defence contracting, whilst ensuring a fair balance between risk and reward for suppliers.

18. Indeed, CBI members have a number of concerns about the Government’s proposals which should be carefully considered and addressed through the legislative process in order to achieve consensus on the new framework. Firstly, it is crucial that the Single Source Regulations Office (SSRO), the new Non-Departmental Public Body (NDPB) being established to govern the new regime, is viewed as truly independent and impartial by industry. As such, we believe there is a case for reconsidering the powers the legislation hands to the Secretary of State (e.g. over abolishing the SSRO, appointment of the chair, removal of board members, etc.), so that industry has assurances that the SSRO is free from political influence over its governance and processes.

19. The CBI also believes the Government should enshrine within the legislation a commitment to equal composition of the SSRO Board, to which both Government and industry are able to nominate suitable representatives, and allow for Board nominations to be scrutinised by Parliament through an appropriate select committee.

20. The introduction of the new single source framework must also avoid unintended consequences for UK defence suppliers and the vitality and strength of their supply chains. At present, there is a risk that UK suppliers could be placed at a competitive disadvantage should overseas suppliers not be subject to the new regime. Over time, this could result in suppliers choosing to leave the UK market with significant negative consequences for jobs and growth. To avoid this, the Government must commit to ensuring there is a level playing field with both domestic and overseas suppliers under the jurisdiction of the new regulations governing UK single source contracts.

21. In addition, there is a lack of clarity in the Bill about how the new pricing regulations and reporting requirements will apply to SMEs, with CBI members concerned that the new regime might act as an additional burden and barrier to entry for smaller suppliers. The CBI believes fuller analysis is required of the impact of the regulations on SMEs, in order to sustain a diverse and competitive defence supply chain in the UK which promotes quality, innovation and value for money.

22. Similarly, the legislation should also include further provisions on confidentiality and the safeguarding of commercially-sensitive information which suppliers submit to the SSRO. In particular, there is a case for extending the criminal offence provision to include failure to protect against unauthorised disclosure of suppliers’ information. Industry also needs a clearer understanding of the potential interaction between the SSRO and the GoCo so that steps can be taken to avoid duplication and to mitigate unnecessary bureaucracy.

23. Finally, when introducing the new statutory framework, the Government should look to avoid changes which might result in a more adversarial approach to pricing and contract negotiations with industry regarding UK single source contracts. CBI members have concerns that the proposed new regime risks undermining the collaborative approach between Government and industry that has been a hallmark of the Yellow Book’s voluntary arrangements.

24. For example, the legislation permits the MoD to challenge a contract price at any time up to two years after contract award, which would cause uncertainty for suppliers and potentially undermine shareholder value and willingness to invest in the UK. To alleviate industry’s concerns, the legislation should  clearly define the grounds on which a challenge can be made, and limit the number of times and overall timeframe within which the MoD can appeal to the SSRO to challenge a contract price.

The CBI welcomed the recent Future Forces White Paper, which addressed the majority of employers’ concerns on the Government’s proposals to reform the Reserves

25. CBI members recognise the importance of national security and the crucial role of the Armed Forces, and the CBI signed the Armed Forces Corporate Covenant at its launch in June in support of the Forces community.

26. Reservists play an important role in preserving our military capability, particularly in specialist fields. Businesses also recognise the positive contribution that Reservists make in the workplace with skills they develop and strengthen whilst serving in the Armed Forces.

27. With regards to the specific changes the Government is looking to introduce, the CBI had some initial concerns with aspects of the Future Reserves 2020 green paper, especially the possible introduction of ‘discrimination’ type legislation. Our response to the green paper argued these proposals went against the partnership approach that is needed between employers and the Armed Forces to make the reforms work, and CBI members were particularly concerned that it could strain working relationships between employers and Reservists.

28. Similarly, we also argued more could be done to ensure that employers had as much notice as possible of mobilisation and training, alongside clearer and consistent communication to employers, targeted financial assistance, and accreditation of skills and training for the workplace.

29. These concerns were largely addressed in the Future Forces White Paper published in July 2013, which the CBI welcomed. Our members support the partnership approach that is now being adopted, and the fact that the Ministry of Defence listened to the concerns from within the business community around taking a purely legalistic approach. We are especially pleased that the revised proposals include additional financial support for small businesses and a single contact point for large employers.

September 2013

Prepared 9th October 2013