Defence Reform Bill

Written evidence from Prospect (DR 03)

Introduction

1. Prospect is an independent trade union representing 120,000 professional, managerial, technical and scientific staff across the private and public sectors. Our members work in a range of jobs in a variety of different areas including in agriculture, defence, energy, environment, telecommunications, heritage and scientific research.

2. Within the defence sector, Prospect has approximately 13,000 members split evenly between the MOD and defence contractors. The MOD contingent includes over 2,000 members in Defence Equipment and Support (DE&S) with the remainder working in other technical and specialist roles in direct support of the armed forces, from the Defence Infrastructure Organisation through military training and education, to research and analysis in Dstl and Defence Intelligence. Private sector companies where Prospect has a significant membership include QinetiQ, AWE, BAE Systems, Babcock and Serco. Many of our relationships with these companies formed when MOD functions have been contracted-out or privatised over the last 30 years. As such, Prospect has extensive experience of the move of Civil Service functions to the private sector.

3. The Defence Reform Bill contains provisions which are likely to have a significant impact on the majority of Prospect members employed in the Defence Sector. We welcome the opportunity to contribute evidence to the committee. The views in this memorandum reflect Prospect policy as well as the comments and views of elected officials and members on their reaction to the government’s proposals.

4. The key points and issues for clarification raised are summarised in the section below. Detailed comments are provided in later sections.

Summary of key points and issues for clarification

5. The government is right to seek to modernise defence procurement. The MOD summarises the challenges thus:

… identified three "root causes" of underperformance; an over-heated Equipment Programme; an unstable interface between those parts of the MOD which request acquisition and support services and the Defence Equipment & Support organisation (DE&S) which delivers them; and a lack of business capability (processes, tools and skills), including management freedoms. [1]  

The key question for Prospect is: how do the changes enabled by the Defence Reform Bill ‘fix’ these problems? The Impact Assessment goes on to acknowledge that Defence Transformation has already started to address some of these issues, but suggests that the DE&S GOCO is required to correct "Poor specification by the Armed Forces, a lack of understanding of cost drivers, poor initial cost estimation and insufficient project control by the DE&S".

6. Repeated statements by both CDM and the Secretary of State have made it clear that the principal driver for the DE&S GOCO being the preferred option is the need to remove the staff from the Civil Service and, as such from direct control of the Cabinet Office and the Treasury; in other words, the ‘freedom’ to recruit, reward and release staff. Prospect certainly shares one of the three declared objectives of the Materiel Strategy: "a DE&S with engaged and motivated staff with the behaviours, accountabilities, skills and processes required to do the job." Indeed, we have been trying to highlight the impact of the long-term erosion of technical and specialist capability (the loss of the ‘intelligent customer’) for years, but have been ignored. However, we are at a loss to understand why (other than dogma) the government refuses to allow DE&S to reform its own HR policies and processes and why, therefore, such a huge change as the creation of a GOCO – with all the risks that entails – is required.

Any projected savings that favour the GOCO over DE&S+ have to be a lot more than marginal if these risks are going to be acceptable.

7. In fact, Prospect would argue that DE&S is simply the most high-value and visible example of the loss of capability to do this sort of work across the Civil Service. This is a result of the failure of successive government’s both to recognise the specialist skills required in the Civil Service and to understand how those skills need to be developed, nurtured and rewarded. ‘Fixing’ DE&S will not fix rail franchising and it will not fix IT procurement.

8. We challenge the notion that GOCO is the solution to these problems. It might be a solution, but there are better solutions. The only obstacle to reform within the Civil Service appears to be government policy on the pay and conditions and personnel management of civil servants. We agree that these policies are not sensitive to the particular requirements of a highly complex and specialist business as defence procurement. But, shouldn’t that fact inform a change in government policy?

9. If the Treasury and Cabinet Office view is that DE&S staff must be subject to the ‘vanilla’ management applied to the rest of the civil servants, then the government has to quantify the additional costs and risks presented by the GOCO option. This is a huge and potentially very expensive change for what appears to be an easily-realised prize.

10. In short, Prospect believes the GOCO solution will not work. Not withstanding the juicy carrots being dangled in front of them, our members believe that their activities should be conducted by the MOD for Defence, not outside of the MOD for profit.

11. If GOCO is to happen, Prospect seeks some key reassurances:

· Renewal of the enabling agreement between industry, the MOD and the unions on the handling of staff transfers to industrial partners. This will help secure an orderly change.

· No two-tier workforce: if enhanced terms and conditions are introduced for new GOCO employees, then staff who have transferred-in should benefit from those changes.

· The New Deal arrangements being designed for the PCSPS should be applied, ensuring that staff take membership of the PCSPS with them into the GOCO and all new employees of the GOCO become members of that scheme.

12. Prospect is broadly neutral on the proposals relating to Single Source Contracts, but we do have significant experience of regulated industries (including representation of the staff in most Regulators) which raises a number of questions about the MOD’s plans. Fundamentally, it is difficult to see where the MOD will draw this and other intelligent customer communities from when it has contracted-out much of its technical and commercial expertise.

13. The SSRO should be tasked with some responsibility for using defence procurement to sustain the industrial skills base and ensuring that key capabilities required in the long-term are not lost.

Part 1: Defence Procurement

Scope of the GOCO

14. The Defence Secretary’s statement on the Bill suggested that the GOCO will assume responsibility for the current DE&S’s procurement functions alone – approximately half the present staff. The plans for equipment support are less clear and, therefore, the objectives and implications of the Bill are unclear. Through Life Capability Management (TLCM) envisaged a ‘cradle to grave’ approach to defence acquisition: a single contract for the design, manufacture, support and disposal of equipment, with, in its purest form, the contract specifying the availability of a military capability rather than specific numbers of particular bits of kit. As with so many change initiatives in the MOD, TLCM was not allowed to prove itself (and was not evaluated) before being overtaken by The Next Big Thing.

15. But support accounts for a growing proportion of equipment spending. As RUSI observed recently :

The MoD is also likely to be asked to look at its growing expenditure on equipment support (which now accounts for a third of the resource budget) as a possible source for savings. While the total defence budget is due to fall in real terms by 7.8 per cent between 2012/13 and 2014/15, planned equipment support spending is due to rise by 5.6 per cent. These numbers suggest that equipment support spending has been relatively unaffected by the rationalisations and reductions set in motion by the SDSR.’ [1]

16. It appears that support activities will variously be transferred to the Front Line Commands (HMNaval Bases), privatised (DSG), contracted-out (LSC), or a combination of these. Is this the end for TLCM? How will the Bill address the cost inflation RUSI has identified? Cost inflation that is arguably a product of the extensive privatisation and contractorisation of support activities over the last 30 years. And this has levied the additional cost of a loss of technical capability within the MOD, with the loss of its nursery for the development of engineering managers and project managers with direct industrial experience.

Employment in the GOCO

17. Prospect seeks some key reassurances:

· Renewal of the enabling agreement between industry, the MOD and the unions on the handling of staff transfers to industrial partners. This will help secure an orderly change.

· No two-tier workforce: if enhanced terms and conditions are introduced for new GOCO employees, then staff who have transferred-in should benefit from those changes, including career development opportunities.

· The New Deal arrangements being designed for the PCSPS should be applied, ensuring that staff take membership of the PCSPS with them into the GOCO and all new employees of the GOCO should have the option to become members of that scheme.

18. In addition to the normal procedures to comply with TUPE, there is a tripartite agreement - the Code of practice for staff transfers in MOD Contracts - between MOD, the unions and industry. This was signed by a Minister for the department and by the CBI and the Defence Manufacturers Association for industry. Prospect believes this agreement should be renewed, amended as necessary to ensure that it is fit for the purpose envisaged by the Bill.

19. The MOD’s Impact Assessment says:

It is envisaged that the GOCO partner (in relation to the Operating Company) would seek to benefit from greater HR freedoms and flexibilities to change culture and behaviours in DE&S, subject to compliance with employment legislation and any restrictions imposed by the GOCO contract.

What would these restrictions be? We suspect that the dead hand of the Treasury might continue to restrain the GOCO.

20. We could provide the Committee with extensive evidence on the problems created for DE&S by its inability to recruit, develop and reward specialist staff properly. We have submitted evidence on this issue to both the Defence Committee and the PAC in the past. Suffice to say: there is growing evidence of severe shortages in key specialist areas, resulting in major capability gaps. The costs of the neglect of specialist skills in the MOD are all too apparent: safety incidents (Nimrod XV230), engineering disasters (Astute) and increased costs (the explosion in FATS spend).

21. The Impact Assessment continues:

It is envisaged that:

The Contracting Entity would have the freedom (in relation to the Operating Company) to set its own talent management strategy (recruitment, retention, reward and release of staff) and could introduce changes to the contractual employment terms of transferred civilian staff (through the normal course of business) subject to consulting employees and their representatives in line with employment law; and,

The Contracting Entity would be free to provide new recruits to the Operating Company with a different employment contract. The Contracting Entity would also have the freedom (within certain constraints) to manage the terms and conditions of its employees in the Operating Company to deliver the required outputs.

This seems to herald the creation of a two-tier workforce: the bulk of the DE&S staff on legacy terms and conditions, failing to benefit from the release from Treasury control, while external recruits to the GOCO are brought in on higher pay and lucrative bonus schemes. Prospect requires reassurance on this – ideally through provisions in the Bill. DE&S is already seeking to recruit staff externally through the use of financial incentives (known as Higher Starting Pay, or HSP) leapfrogging existing staff who have been subject to pay restraint over recent years. Internal candidates successful in applying for posts advertised with HSP are deemed ineligible to benefit from the enhanced pay. This is having a catastrophic impact on morale within DE&S.

Prospect wants to see the Bill outlaw the creation of a two-tier workforce in the GOCO.

22. One of the unspoken drivers for the GOCO is the desire to remove military officers from procurement decisions. It is an open secret that military staff in leadership positions in DE&S are in post for too short a time to build expertise, that specifications are changed with the arrival of their replacement and that they owe their loyalty (and career prospects) to their Service, not to DE&S. The Defence Secretary suggested in the second reading of the Bill that military staff would be seconded to the GOCO to represent the customer (ie the Front Line Commands) and there is no doubt that this knowledge of operational requirements would still be vital. However, it is less than clear that this intention is shared. The MOD Impact Assessment says:

Military staff drawn from all three Armed Forces provide military skills, knowledge and experience to support the delivery of Defence acquisition in the current DE&S organisation. We envisage that this would continue under the GOCO operating model. The placement of military personnel in the Operating Company means they would not be employees of the Contracting Entity or the Operating Company.

The role of military officers in the GOCO needs to be clarified.

23. Reassurances on these issues would be welcome. But we return to our fundamental question: if the case for GOCO is built principally on the need to employ the right people properly, why can’t that be done within the Civil Service? The MOD has not exploited the pay flexibilities that do exist; it has not advocated the need for a different employment framework for specialists sufficiently strongly and the result has been the imposition of dysfunctional systems.

Assessment of the GOCO option

24. In recent years, numerous steps have already been taken to address the MOD’s problems: most recently with Defence Transformation. DE&S’s performance is arguably much-improved in the last five years. But he most recent changes have not had time to prove themselves. How will the potential impact of the GOCO option be assessed ceteris paribus?

25. The GOCO decision is to be determined through assessment against an in-house benchmark: DE&S+. It is not clear whether the team developing DE&S+ are being given the same level of resources and support as the other bidders have at their disposal. Of greater concern is a statement in the MOD’s Explanatory Notes to the Bill; under the heading Financial effects, paragraph 166 says:

If the Part 1 arrangements are made, they are expected to deliver a net benefit of £934m over 10 years. The new arrangements will be established in stages and steady state is expected by 2024/2025. Should the public-sector comparator (DE&S+) option be chosen, savings are estimated to be a third lower.

It is not clear where this assessment comes from and we urge the Committee to seek further information on this. The forecast returns from any reform should be robust and significant enough to justify the risks.

26. The GOCO will present new costs: most obviously the margin charged by the consortium. And it presents new risks: an extra layer of decision-making, the need for an extremely complex contract and the replacement of political control with commercial control. Is the possibly marginal improvement to be gained by GOCO worth the additional costs and risks? Is a one-year pilot enough to test the change?

Part 2: Single Source Contracts

27. The creation of the Single Source Regulations Office represents a significant increase in the oversight of non-commercial contracts in the defence sector, which is expected to deliver a net benefit of £1,712m over 20 years, with steady state benefits of circa £190m per year.

28. Prospect accepts that the ‘Yellow Book’ procedures need to reflect the industrial landscape of the industry. However, it is important to note that the guidance has been periodically updated by the Review Board for Government Contracts. The decision to create a new regulatory body appears to be driven by the government’s determination to increase transparency and to share gains and losses accrued through these contracts. The failings in the current process are rooted in the lack of requirement on contractors to supply the MOD with sufficient information on the pricing of contracts, which results in poor oversight by MOD of contract price outcomes.

29. While there may be benefits in creating an independent regulatory body to scrutinise contracts and ensure that value for money is being obtained from non-commercial contracts; there is clearly a concern that the creation of the SSRO causes a degree of uncertainty for defence contractors. A possible result of the increased scrutiny of the pricing of contracts and company overheads by the SSRO may inadvertently cause job losses, as contractors trim budgets to comply with stricter transparency rules. Increased scrutiny may reduce profits on existing contracts and a stricter application of the rules may create perverse incentives on contractors to reduce efficiencies on future contracts to stay within an agreed price. There is also an additional cost on contractors from the part funding of the SSRO by contractors. While the formula set out in the bill that determines the profits rate, based on the approach developed by the Review Board for Government Contracts, seems to be reasonable, the process of transition may still have a significant impact on some contracts as contractors adjust to the tighter regulatory framework. As a result, Prospect is not convinced that the projected savings will be achieved in practice. The move towards greater regulation of non commercial contracts is likely to cause a behavioural change by employers. This outcome may be desirable from a value for money perspective, but may not generate any additional income for defence contracting.

30. An important element of the contract price is the payment of labour costs. These costs are uncertain and will be subject to the prevailing labour market conditions. Under Clause 20, the SSRO can issue guidance on allowable costs that are "appropriate" and "reasonable". Labour market costs can vary considerably over the course of a long-term contract. Pay bargaining takes account of a number of different factors including affordability, employee development, adjustments to take account of the cost of living, addressing changes in the composition of the workforce and the emergence of skills shortages. In our view the pay budget is best negotiated through collective bargaining arrangements between the contractor and the appropriate recognised trade unions. It would be inappropriate for the SSRO to provide guidance on pay bargaining and attempt to micro-manage pay arrangements within the defence industry.

31. Prospect is concerned that the regulator will not be able to make an informed judgement about the industrial skills needed within the sector. The requirement under Clause 24 to ensure that there is not double counting of overheads by contractors, including industrial skills, would require a high degree of knowledge of the skills needed within the defence sector. At present there is a significant gap in this kind of knowledge of skill needs, both across industry and within the MOD, of the skills needed within the defence sector. This particular clause may deter contractors from investing in the skills needed where these costs are accounted for across a number of different contracts. There needs to be greater clarity about what overhead costs are allowable for skills development and how these will be audited by the SSRO.

32. Without a detailed breakdown of the SSRO it is not possible to judge whether the regulatory body will be sufficient for the sector. The skills needed of those working for the SSRO will be similar to those working for DE&S and the private sector. These skills are highly valuable and so pay rates will have to set at a level that are sufficient to attract those with the skills needed for these highly specialised roles. This will need to include appropriate competencies in the technical and engineering expertise required to make suitable assessments of defence contracts.

September 2013