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Grand Committee

Tuesday, 9 December 2014.

Arrangement of Business


3.30 pm

The Deputy Chairman of Committees (The Countess of Mar) (CB): My Lords, if there is a Division in the House, the Committee will adjourn for 10 minutes.

Single Source Contract Regulations 2014

Motion to Consider

3.30 pm

Moved by Baroness Jolly

That the Grand Committee do consider the Single Source Contract Regulations 2014.

Relevant document: 15th Report from the Joint Committee on Statutory Instruments (Special attention drawn to the instrument)

Baroness Jolly (LD): My Lords, in moving that the draft regulations laid before the House on 29 October 2014 be considered, before I begin I should make the Committee aware of the report by the Joint Committee on Statutory Instruments. I will return to this later in my speech.

Before addressing the draft regulations, I would like to set out the context for this fundamental reform to Ministry of Defence procurement. Open competition remains the best way of ensuring value for money for the taxpayer but there are inevitably occasions where there is only a single provider of a capability we require. Equally, there are situations where we need to maintain critical national industrial capabilities or, indeed, control over intellectual property. This may be achievable only by placing contracts with UK companies without a competitive process. Clearly, in the absence of the disciplines of the marketplace, we need rules governing single source procurement to protect the taxpayers and to ensure our Armed Forces get the most out of every pound spent on defence.

The current framework—the so-called Yellow Book—has remained unchanged for 45 years. It fails to address inherent failures in single source procurement and the lack of competition undermines market pressure to reduce costs and improve efficiency. The lack of an alternative supplier means that we cannot walk away without also walking away from the capability we need. Our suppliers know this, which undermines our ability to drive a hard bargain. Put bluntly, this does not serve the best interests of the taxpayer, nor does it encourage industry to maintain a competitive edge in export markets.

In the Defence Reform Act 2014, the MoD set out the new statutory replacement for the Yellow Book, which we are calling the Orange Book. At the core of this lies the principle that industry should get a fair

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price in exchange for providing the MoD with much greater transparency on its costs and with the protections we need to ensure value for money. This new framework requires single source suppliers to operate on a truly open book basis. Before we sign a contract, suppliers will be required to provide us with extensive information outlining their pricing assumptions. Suppliers will be required to maintain extensive records on cost and performance and to share these records and explain them to us. Even before the DRA received Royal Assent, the MoD had been consulting with industry and Parliament on the draft regulations. While the Act establishes the principles behind the new framework, the regulations give the detail. This gives us the flexibility to adapt the new framework if required.

I should stress that in developing the regulations we have been consulting closely with the defence industry. We have listened carefully to the views of industry and—where appropriate—we have made changes to the regulations. It is simply not in our interests to have a system that is unworkable for industry.

By developing the draft regulations early, we were also able to take Parliament’s view on board. Here I thank noble Lords for the excellence of their scrutiny, and in particular I thank the noble Lord, Lord Tunnicliffe, for his interest and expert engagement on these issues. I have had many detailed conversations with him on these very complex questions and have always found his insights extremely useful. Following a meeting with him last week, I wrote to inform him how the regulations had changed since they were issued in January 2014. It might be useful if I read out this letter.

The letter states:

“At the meeting which I had with you on 3rd December, you raised a number of technical issues on the Single Source Contract Regulations which MOD officials responded to during the meeting. In addition, you asked for a note outlining the key changes made to the draft regulations since they were provided to Parliament prior to the House of Lords scrutiny of the Defence Reform Act in January of this year. I agreed that I would send you a note outlining these changes prior to the debate in Grand Committee.

As you are aware, the regulations were laid in draft before Parliament on 29 October 2014 following extensive consultations with stakeholders and legal scrutiny and assurance. The vast majority of the changes from the version provided in January were made for legal drafting reasons rather than policy changes. These changes reflect the high level of internal legal assurance, input from legal advisors representing the defence industry following consultation, and scrutiny by the Counsel for Joint Committee of Statutory Instruments (JCSI). It would be onerous to list all of these changes: most were made to make the regulations clearer and more effective, to avoid repetition and to fill in the detail, in particular, with regard to reporting requirements. Individual regulations and parts have also been re-ordered.

The main changes of note primarily for legal drafting are as follows.

a. To provide a better definition of the contract end date (Reg 4).

b. To make better provision for calculating the value of a contract (Reg 5).

c. To provide for qualifying defence contracts and qualifying subcontracts made under framework contracts (Reg 9 and Reg 60).

d. To remove duplication in regard to information required from contract reports (Reg 22-Reg 30).

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e. To re-work the provisions, e.g. with reference to the obligation to provide supplier-level reports under Reg 34-Reg 39 (Reg 31 and Reg 32).

f. removal of duplication in regard to information required from supplier reports (Reg 33-Reg 45).

In addition, a number of changes have been made for policy reasons. The main changes made are as follows.

(a) The Coming into Force (CIF) date (Reg 1) has changed from ‘1 October 2014’ to ‘on the day after the day on which they are made’. In practical terms this means, subject to Parliamentary approval, a few days after debates in both Houses have concluded. This change was made because, given the detailed and technical nature of the regulations and restraints on Parliamentary time, the Oct 2014 date could not be met.

(b) The definition of ‘defence purposes’ (Reg 3) has been changed from the previous draft which referred to contracts where ‘Secretary of State for Defence is party to the contract’ to the current wording for contracts that are for ‘the purposes of defence (whether or not of the United Kingdom), or related purposes’. This has been done because a strict legal interpretation of the Act requires us to define defence purposes, and the original definition was a description of circumstances rather than a definition. Legal advice is that the new definition achieves the same policy effect.

(c) The introduction of a two-tier approach to value thresholds for qualifying defence contracts (Reg 6). Between CIF and the end of March 2015, the value threshold for a qualifying defence contract is £500m. After this date, this drops to £5m. This ensures the most material contracts are caught as soon as possible, while limiting the number of early adopters to a practical level, which will assist the Single Source Regulations Office (SSRO) to prepare for increasing volumes of qualifying contracts from April 2015.

(d) The introduction of two new regulated pricing methods (Reg 10). The ‘estimate-based fee pricing method’ allows for a form of cost-plus contract where the profit is agreed in advance rather than being proportional to costs. This removes a financial incentive on suppliers to increase their costs so as to receive a greater profit. The ‘volume-driven pricing method’ allows for availability contracts where the price is agreed as a price per unit output (e.g. £x per flying hour).

(e) The initial profit rates (Reg 11). The SSRO will recommend its first set of profit rates by 31 Jan 2015, and the Secretary of State will publish the final rates in the London Gazette by 15 Mar 2015. Between the CIF and the end of March 2015, there is no profit rate published in the London Gazette. During this period, transitional rates will be used which are those recommended by the Review Board for Government Contracts (the arms-length body who currently recommend profit rates for single source contracts, and who are being replaced in due course by the SSRO).

(f) The introduction of a minimum threshold for subcontracts to be considered when making an adjustment under step 3 of the calculation of the Contract Profit Rate (see section 15 of the Act) (Reg 12). The step 3 adjustment ensures that suppliers do not get multiple layers of profit by virtue of subcontracting to other suppliers within the same corporate group. Although simple in theory, in practice calculating this adjustment is complex and resource intensive, so we have introduced a value threshold of £100,000. Subcontracts below this value are not to be considered when making a step 3 adjustment.

(g) Greater contract-level reporting requirements for the ‘Interim contract report’ (ICR) (Reg 27). To avoid duplication, the information asked for in the ‘Quarterly Contract Report’ (QCR, see Reg 26) was removed from the ICR. The QCR is, however, only required for contracts above £50m, meaning contracts between £5m and £50m did not provide all information we wanted. Additional information requirements have been thus been added to the ICR for contracts between £5m and £50m.

(h) The introduction of a two-tier approach to the value thresholds for supplier-level reporting (Reg 31). As soon as a supplier signs a QDC in excess of this threshold, the supplier reporting requirement outlined in Part 6 applies to all the business

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units involved in single source procurement within that supplier’s corporate group. The value has been set to an initially lower level of £20 million until 1 April 2017, when it rises to £50 million. This is to expedite the introduction of the new supplier-level reporting and overhead recovery requirements.

(i) Increased supplier-level reporting information requirements (Regs 40-44). The ‘long-term overhead report’ (Reg 48 in the previous draft version provided to the House of Lords) has been replaced by the ‘Strategic industry capacity report’. Additional information requirements have been identified which support the MoD in getting value for money from single source procurement.

(j) Maximum penalties (Reg 50). The Act requires the regulations to set out maximum civil penalty amounts for reporting failures (see section 33(1)). These have now been included.

(k) Qualifying Subcontracts (Reg 58). To be a qualifying subcontract, the majority of the work done under a single source subcontract has to relate to qualifying defence contracts or subcontracts (current or prospective). This is to exclude subcontracts that are predominantly to support competitive contracts, for which there should be sufficient market pressure to encourage the supplier to get value for money from their subcontracts”.

Although the form and wording of the regulations have evolved since January, there have been limited substantial changes to the underlying policy. The regulations describe how the new framework will operate. It would be onerous to go into this in detail but I will draw the Committee’s attention to a few key elements.

First, I note that one of the main functions of the regulations is to set out the scope, frequency and nature of the information required from our suppliers. The Committee will understand why this needs to be spelt out in detail to remove any ambiguity.

Secondly, I will highlight our intention to bring the new framework into force with effect as soon as it has been cleared by Parliament. However, this will be implemented in two phases. Between the coming into force date and the end of March 2015, the value threshold for a qualifying defence contract will be £500 million and above. After this date, this threshold will drop to £5 million and above. This phased approach maximises the benefits from the new system while limiting the number of early adopters to a practical level. This will assist the SSRO to prepare for increasing volumes of qualifying contracts from April 2015 and will allow it the opportunity to issue guidance on the new framework.

3.45 pm

As from April 2015 onwards, we estimate that between 100 and 200 single source contracts a year will be subject to the Orange Book. The MoD has been working hard to engage with the early adopter projects, which are likely to be the first to sign qualifying defence contracts over the coming months. We recognise that this reform represents a step change in how single source procurement is carried out.

We are also developing written guidance and training courses for MoD staff who are directly involved with the new framework, and we are engaging with industry through a variety of different channels to make it aware of how the changes will affect it and to encourage it to respond accordingly and in a timely manner.

Considerable progress has been made in establishing the independent regulator—the SSRO. The chair was appointed in May 2014 and non-executive directors in October. The SSRO has been consulting with stakeholders,

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especially in industry, on how the new framework will work. While the requirements imposed by the statutory legislation are clearly defined, we have assured stakeholders that we will adopt a pragmatic attitude with regard to implementation.

On the report issued by the Joint Committee on Statutory Instruments, I will first thank the committee for its careful scrutiny of the draft regulations. Given the complexity and scope of the regulations, it would be surprising if this distinguished committee did not find some points of difference. However, I am encouraged that the issues raised by the committee are modest in scope, which is a reflection of the extensive process of drafting review which the regulations have gone through. The department’s reply is on the JCSI website. I will address the committee’s points, but I stress that none of them impacts on the effectiveness of the regulations or creates ambiguity for the users of the regulations.

The JCSI has identified that Regulation 5(3)(i) is defectively drafted. That regulation refers to the date a particular assessment is made under Regulation 12(1). In fact, 12(1) sets out the circumstances in which an assessment must be made under 12(2) and 12(3), so the actual assessment is made in 12(2) and 12(3) rather than 12(1). Thus the reference to “12(1)” should more correctly read “12(2) or (3)”.

That is a very minor, technical point. We are of the view that there is no danger of users being misled or confused by our intended approach, and no ambiguity is created. We therefore agree that this point is cleared up as soon as convenient when the regulations are next amended. However, I stress that until this amendment is made, there will be no impairment to the effectiveness of the regulations.

The committee has also identified that the “firm pricing method” in Regulation 10(4) and the “target pricing method” in 10(11) are identical in that they both provide for the allowable costs to be estimated at the time of contract let. That was covered in the MoD memorandum. The committee is correct that the two pricing methods do not differ in terms of when the price is estimated, but they differ substantially once the price has been agreed.

For firm price contracts, the price remains constant, whereas in target price contracts an adjustment is made to the price at the end of the contract. Actual costs are compared with estimated costs, and the price is adjusted to share any gains or losses between the parties. These target price contracts are commonplace, typically accounting for 40% of the value of MoD single source procurement.

In preparing the DRA, we wanted to ensure that this commercial model was still available. This is expressly allowed for under Section 16 of the Act. As with all commercial models, it is necessary to specify in the regulations how the price of these target price contracts should be determined. We could have said that they are initially priced using the same approach as firm price contracts, or we could have done as we did: namely, specifying a target pricing method. From a practical perspective, there is little to choose between these two options. However, our approach has benefits, which I will explain.

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Different pricing methods may be used for different components of a contract, as in Regulation 10(3). It is not uncommon for a contract to have one component priced using the firm price method and another priced using the target price method. Although the initial price of both components is determined in the same way, the subsequent reporting is different and the final price will differ, depending on which method is used. Including target pricing as a distinct pricing method allows the two components to be separately identified later in the draft regulations, such as in Regulation 22(2)(k), which requires that the total price be broken down by the different regulated pricing methods used for that contract. As this is a practice with which users are already familiar, it is our view that significant confusion would result were they not separately defined pricing methods. We therefore propose no change to the regulation, on the grounds that it is helpful to the users of the framework and does not in any way reduce the effectiveness of the regulations.

The committee also draws attention to Regulation 11 and the interim rates. Again, the MoD responded to this point in its memorandum; we noted that these are transitional provisions, the vires for which are in Section 42(1) of the Act. Regulation 11 determines the profit rate used on single source contracts, which is described in Section 17 and further expanded on by Regulation 11. Three of the six steps require the use of standard profit rates, which must be published by the Secretary of State by 15 March each year. In normal circumstances this will be an annual process, but for the first year after coming into force it would have required the Secretary of State to have published the rates before the Act received Royal Assent. The Act required transitional rates to apply between its coming into force and 1 April 2015. If there is any doubt as to the vires required to make these transitional arrangements, it is covered by the “supplementary” or “incidental” aspect of Section 42(1). Rather than setting out these transitional rates in Regulation 11, they could have been put in the relevant commencement order, the vires for which would be Section 50(10). However, we chose to put them in the regulations as that is easier for users.

The transitional rates used are the most recent recommendations made by the Review Board for Government Contracts, an existing arm’s-length body whose duty it is to recommend profit rates for use on single source contracts, albeit under the old non-statutory Yellow Book regime. The review board’s functions will be taken over by the new SSRO. I note that the committee stated that,

“there must at … least be doubts”,

about the MoD’s approach, which suggests that different but valid views are possible. The committee appeared to prefer that these interim rates should be established through a commencement order. We do not agree; it is better for users to have all these elements contained in a single place: namely, the regulations. We therefore propose to make no change to the regulations.

The last of the committee’s four points relates to the use of the words “within the relevant year”. The committee points out that in a strictly legal sense we do not need to repeat that phrase, which is defined in

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Regulation 13(1), in its paragraphs (2), (4) and (5). While technically correct, these words are harmless and do not impair the meaning of the regulations. However, the MOD agrees to make a suitable correction when the regulations are amended.

In summary, with regard to the points raised by the JCSI, the MoD has obtained legal advice and is confident that the regulations are entirely fit for purpose as drafted. We have considered the JCSI report very carefully and are proposing to make two amendments at an appropriate time. We are confident that the regulations as drafted are fully effective in achieving our objectives.

In conclusion, the changes we are introducing to single source procurement are long overdue and represent a significant enhancement to how we procure for this key part of our defence capability. This is a fundamental reform developed over a considerable period of time and following extensive preparation. We expect that the benefits will fully emerge only over the longer term but are entirely confident that these benefits will be both substantial and wide-ranging. I commend the regulations to the Committee.

Lord Tunnicliffe (Lab): My Lords, I thank the Minister, the noble Baroness, Lady Jolly, for that introduction. I would just like to say a word about the role of the Official Opposition in this process. The Act and the regulations are enormously complex and, in taking the Bill through, we took a decision to have most of our conversations with the Government not on the Floor of the House, and to make sure that the clarifications and so on that emerged were read into Hansard during the subsequent debates. That worked very well.

The problem with taking that forward, of course, is that the regulations, I think, are actually longer than the section of the Act that they refer to. Therefore there were as many concerns of detail in the regulations as there were in the Act, and I thank the Minister and her officials for finding time to talk to us about the regulations and for her letter. It was important to read it into the record because Hansard, in a sense, lives for ever—one has only to walk down our corridors to realise that—whereas, splendid as the letter is, I will probably lose it and probably nobody else will actually see it. Having it in the record is therefore worth while. Therefore I thank the Minister for that repetition, long as it necessarily was.

On the general thrust of the Act and the regulations, I commend the Government for bringing them forward. I believe that it has taken them something like five years to work on this issue. I see nothing political about it, and the Ministry of Defence is now equipped with a piece of legislation that gives it some sort of equality of arms when working with large manufacturers —to which, for reasons of sovereignty, we have effectively ceded monopoly power. So far, I am happy with where we are. I accept that the divisions the noble Baroness set out in the letter were technical policy matters. We have checked through the letter and are happy with it.

Unfortunately, in a sense, the Joint Committee on Statutory Instruments came through with its report a little late. I am not criticising that committee. The accident of timing, together with the demands of my

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wife, meant that my attention rested on the report only on Monday morning. I thank the Minister for taking it on board and responding to it.

I hope that I will be forgiven for my rather halting presentation. There are four relevant issues, the first of which relates to Regulation 5(3)(a)(i) and the Joint Committee’s concern about the reference to Regulation 12(1). As I understand it, the Government entirely take this point and will correct it in a subsequent regulation. The Committee will today not be well served by me going on about it any further.

The next point that the Joint Committee raised was essentially a drafting point. I think in a sense the committee was complaining that there was repetition. The problem with repetition if you are a lawyer is that you create synonyms, and synonyms are bad news because it is a feast for lawyers to work out which interpretation to take and gain the edge. The problem arises because of the shape of Regulation 10. In some ways, if the different methods of contract had been set out plainly with reference to pricing, it would be clearer. Despite the explanation given by the Minister, I still think that this particular regulation is—how shall I put it?—a little messy and inelegant. However, I accept that it probably has no substantial impact.

4 pm

The area that is somewhat worrying is the assertion by the committee that Regulation 42(1)—concerned with interim figures—was in fact not powerful enough. In private discussions I have asked whether 42(1) was in effect a Henry VIII clause, and people say it is not because it does not change primary legislation. It is something less powerful and the committee is essentially saying that it addresses the whole essence of Section 17 of the Act, which gives no opportunity for the interim regulations.

I do not want to press the matter further simply because the number of contracts to which this refers is going to be limited. However, if you have one set of lawyers—and let us face it, that is what the JCSI is saying—asserting that they do not believe Regulation 41 gives you the power to do this, and the ministry has another set of lawyers who say that we do have the power to do it, it will be a lawyers’ fest if that turns into a row. I always like to help the Government not to encourage lawyers’ fests, because the last group of people in this world I want to see get richer are lawyers. It seems the Government are not willing to take the committee’s point on this beyond doubt. I think the Minister mentioned that it could have been handled in Section 50(10); perhaps it should have been. Equally, I recognise that the whole relevance of this regulation, inasmuch as 42(1) is called into question, dies in the spring of next year. In that sense, let us hope that we do not have a row with a big bully supplier before then.

I think that the final concern of the JCSI was a somewhat fine point, which is really code for, “I had to read it a lot of times to start to understand it”. Since the Minister is saying that that fine point is taken and will be addressed in subsequent revisions, I will say that I am content not to pursue the matter further at this point.

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I would like just a little bit of a moan about the two documents. It may be a moan that is impossible to satisfy. Such intercomplexity—if there is such a concept—may be absolutely inevitable for a document such as this. For my own entertainment I tried to trace down the cross-referencing and it bored me to tears—so I do not see why the Committee should not have a minute or two of it.

Section 16(1) in the Act demands Regulation 10. Then there are Sections 18(2)(a) and 18(2)(b). Every time the Opposition say, “We don’t like ‘may’, we like ‘must’”, we are told that the drafting convention is that “may” means “must”. However, for the first time in history, “may” apparently really means “may”, and the may in there says, “We are not going to bother with a regulation to cover 18(2)(a) and (b)”. That is a joy, but I would be gratified if the Minister would confirm that that is the decision.

To find the regulation referred to in Section 18(2)(c), you have to go to Regulation 13; for Section 18(3), Regulation 18; for Section 21(1), Regulation 17; and to find the regulations relating to Sections 21(4), 21(5) and 21(6), you go back to Regulation 16. I do not believe that there is a bear of little brain out there who actually understands that lot. In a sense, I think the Ministry takes that point, because it is committed to providing training, guidance material and even—perhaps the Minister can clear up this point—training for industry to help it understand this.

The only problem with that is that there will then be a difference between the guidance and the Act and the regulations. We have to go back to what the Act and these regulations are for. On my reading, they are to stop big industry bullying government and to create a legal framework that says to big industry, “This is the only way we can do business”. The problem with that is that big industry has deep pockets, often created by us, the taxpayers. With those deep pockets, if there is a dispute, industry would, again, have an army of lawyers, and one area that may emerge is the complexity of the relationship between the Act and regulations, and then the guidance.

In some ways, I wish that these regulations had come along a little bit later. They could have done a little more tidying up and included some cross-referencing, and could have perhaps taken longer to consider the JCSI’s comments, which could then have been taken account of in resubmitted regulations. In general, I am happy and can assure the Minister that what she has said today will be studied by my much more expert friends in the Commons before they have their own discussion tomorrow. We will therefore perhaps get another view of how acceptable these regulations are. However, in the review that I have done so far, I am concerned about undue complexity but am content that the key issues that the JCSI has brought up are going to be subsequently corrected.

However, I would like to ask the Minister about the whole issue of transparency, which is in a sense subsequent to the regulations. We have shone a light on this mysterious area by virtue of having a Bill. I suspect that none of us other than those working in the Ministry of Defence has thought about this problem at the very top of our minds before, but that has

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caused us to research this and to suddenly realise that you do not know when these things are happening. If you google them, you would get more out of the rather boastful BAE Systems press releases assuring its shareholders that it has done a good deal as opposed to it coming out from government.

I may not have been listening or not reading every Written Statement, but I ask the Minister in what way Parliament will know how the Act is working. How will it know which of the various pricing mechanisms that we have very carefully gone over are being used? There is a final price adjustment, which is an important part of that. I have looked into the Act and the schedules and note that the SSRO has to give an annual report. However, the requirements of that annual report are very thin. Basically, it has to account for its budget and so on. Do the Government have any ideas on keeping Parliament informed about how the Act and regulations will be used?

It is worth stressing for the record that we are talking about something in the order of £7 billion-worth of expenditure per annum—a very considerable sum of money. Everyone who has been involved in defence procurement has been deeply uncomfortable for years, and probably decades, about whether the taxpayer was getting value for money with these contracts because of the sheer difficulty of seeing into them and the limited powers we had from the Yellow Book. I applaud the emergence of the Orange Book and I look forward to getting a copy, if only for the colour.

Baroness Jolly: I thank the noble Lord for his interesting and valuable comments and I shall address the points he raised as far as I can. We shall be in touch with him on any unaddressed points.

On his comment about the regulations being difficult for a lay audience to understand, and that the way they are laid out bears no relationship to the Act and that the cross-referencing of the two proved quite a challenge, we have done everything we can to make them as clear and comprehensible as possible. However, inevitably, they are highly technical and dry. They relate to a complex and specialist subject and it is necessary that they are accurate and precise. Everything in the regulations addresses specific issues in providing for the new framework for single source procurement.

When we had our meeting last week we discussed the intention that industry would probably not use the regulations but that the SSRO would produce specialist toolkits to guide industry through the morass of legislation and regulation. So, although those of us who enjoy reading these sorts of things might have had a problem, the department is doing all it can to smooth them out.

On the issue of training for industry, extensive briefing material has been provided. We have discussed this extensively in consultation with industry. We are providing workshops, briefing early adopters—including industry—and much of our guidance is on the internet, visible to industry and transparent.

“Mays” and “musts” is a good House of Lords regulation issue. I can confirm that the “may” in Section 18(2)(a) and (b) has not been used in the regulations. “May” does not mean “must”. I hope that the noble Lord is happy about that.

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I thank the noble Lord for his comments and I hope that I have answered the main points raised during the debate. I further hope that Members of the Committee appreciate the Government’s commitment to improving this key component of our approach to procurement. This is a fundamental reform to a system which is well overdue for change. We continue to work with the SSRO and industry to ensure that implementation of the new approach is pursued as effectively and smoothly as possible.

Before I finish, I will not only repeat my thanks to the noble Lord, Lord Tunnicliffe, but thank the officials who not only had to teach me the intricacies of single source procurement—

Lord Tunnicliffe: Before the noble Baroness sits down, does she have any comments about the future of transparency? I think she does.

Baroness Jolly: My Lords, it is important that we should understand how any taxpayers’ money is being spent. How will Parliament know? The SSRO will publish an annual adherence report that will be laid before Parliament—helpfully, the officials, who I am praising to the hilt, have told me this—in the usual way. It may be that the noble Lord and I will have to google for press releases.

Lord Tunnicliffe: I know that it is extremely difficult to pick up on this point at the moment. I wonder whether, if the Minister can add a little more, she will write me a letter and place a copy in the Library.

Baroness Jolly: I will willingly do that and pop a copy into the Library. Finally, I commend the regulations to the Committee.

Motion agreed.

Electricity Capacity (Supplier Payment etc.) Regulations 2014

Motion to Consider

4.16 pm

Moved by Baroness Verma

That the Grand Committee do consider the Electricity Capacity (Supplier Payment etc.) Regulations 2014.

Relevant document: 13th Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con): My Lords, this draft instrument—the supplier payment regulations—forms part of the implementing secondary legislation for the Government’s capacity market scheme, which is part of the electricity market reform programme. The powers to make this implementing secondary legislation are found in the Energy Act 2013, which, following

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scrutiny in this House and the other place, received Royal Assent in December last year, with cross-party support.

The capacity market will address our medium-term electricity needs and ensure that there is sufficient electricity supply towards the end of the decade and beyond. It is one of the two key schemes brought in by electricity market reform to incentivise much needed investment into our energy infrastructure. The other, the contract for difference scheme, is not the subject of today’s debate.

The capacity market will help keep the lights on by driving new investment in gas and demand-side capacity, as well as getting the best out of our existing generation fleet as we transition to a low-carbon electricity future. In brief, the capacity market will achieve this by making a regular capacity payment to providers who are successful in capacity auctions. In return for this payment, providers must meet their obligations to provide capacity or reduce demand when the system is tight, ensuring that enough capacity is in place to maintain security of electricity supply.

The supplier payment regulations will sit alongside the Electricity Capacity Regulations 2014, called the principal regulations, and the Capacity Market Rules 2014. The principal regulations and rules, which received parliamentary approval in July this year, brought the capacity market into force on 1 August and, as a result, the first capacity auction will be held later this month for delivery in 2018-19. Those successful in this and subsequent auctions will be awarded capacity agreements entitling them to capacity payments. This will be paid for by a charge on all electricity suppliers. It should also be noted that while the first capacity delivery year will be in 2018-19, the Government are committed to supporting the growth of the demand-side response sector. As part of this, two transitional auctions, just for this sector, will be held in 2015 and 2016 for delivery in 2016-17 and 2017-18. This tailored support will help grow the demand-side and storage industries and ensure effective competition between traditional power plants and new forms of capacity, thereby driving down future costs for consumers. As with payments made during the capacity delivery year, payments made under the transitional auctions will be funded by a charge on all electricity suppliers.

When we debated the principal regulations, I highlighted that the Government would be bringing forward a second set of regulations on the supplier payment arrangements for the capacity market to align the legislative framework for the capacity market and contracts for difference. The supplier payment regulations were not brought in at the same time as the principal regulations, as they are technical provisions which we wanted to get absolutely right. It was not necessary for them to be in force prior to the first capacity auction.

The supplier payment regulations, which suppliers, industry and consumer groups have been consulted on throughout their development, include an obligation on all electricity suppliers to pay a “capacity market supplier charge” from 1 April 2015. As I have mentioned, this charge will fund the capacity payments to those successful in capacity auctions. The first capacity payments

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will be made in 2016 and 2017 to those successful in the transitional auctions, and to those with a capacity agreement for the first capacity delivery year in 2018-19. In addition, the regulations include a small additional levy—known as the settlement costs levy—to cover the operating costs of the government-owned Electricity Settlements Company, whose role it is to calculate, determine and administer the payments from suppliers to those who are successful in the capacity auctions.

The regulations determine how much each licensed supplier will be required to pay for the capacity market. The amount payable by a supplier will be calculated on a supplier’s share of the market, based on how much electricity they were supplying between 4 pm and 7 pm on working days between November and February in the relevant delivery year. This approach seeks to achieve a balance between the objective of incentivising reductions in electricity use, at times when demand is high, and that of remaining predictable and manageable for electricity suppliers who have to pass these costs on to their customers transparently. The regulations will facilitate the flow of payment from all electricity suppliers to those successful in capacity auctions. On receipt of capacity payments, capacity providers are then obliged to provide capacity or reduce demand when required. This therefore ensures security of electricity supplies.

While further amendments will be made in early 2015 to the principal regulations, mainly to enable the Government to meet their commitment to allow interconnected capacity to participate in the capacity market from 2015 onwards, these regulations complete the secondary legislation framework for the capacity market. I beg to move.

Lord Grantchester (Lab): I thank the Minister for her explanation to the Committee of the electricity capacity regulations. She referred to the Energy Act 2013, of which these and other provisions are the consequence. Many days were spent in this very Room debating the issues pertinent to the regulations before us today and we remain supportive of the role of the capacity market mechanisms, as part of electricity market reform. However, one or two curiosities remain from these regulations and I would be grateful if the Minister could clarify them today.

The Minister has made it clear that each supplier will pay the capacity market on a forecast of their share of net demand between 4 pm and 7 pm on working days in winter, and that this will be reconciled using actual demand data once they become known. What degree of accuracy in that forecast is specified in the regulations or is there an element of incentivisation included, such that suppliers do not overbudget the market for cash-flow purposes, resulting in higher consumer costs? How will this element be monitored and any sanction calculated or even applied for, should there be excessive demand forecasting, and what happens if there is then a dispute concerning the calculation of actual demand? What dispute-resolution mechanisms have been proposed?

The regulations also make it clear that should a supplier default on payment, this contribution to the capacity market must be made up through further contributions from the remaining non-defaulting suppliers.

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What degree of allowance for this can a supplier rely on in undertaking his or her forecasting? Have the Government calculated a fair cost element to each supplier of carrying this additional risk and how significant this may become?

In her remarks, the Minister referred to the inclusion of interconnectors. I remember our debates and the encouragement for the inclusion of this innovation, to contribute to the UK’s security of supply. In anticipation of such future inclusion of interconnected capacity, Regulation 3 of the principal regulations is amended in the definition of “providing electricity”. It is obviously disappointing that interconnectors could not take part in the capacity mechanism from the very beginning. With the first round of auctions taking place on 16 December, as she said, the potential for some of these interconnector projects, which could well be in place by 2020, is significant. The impact assessment also notes that a greater degree of interconnection could help to reduce the role of the capacity market in future, yet the capacity market is needed to enable access from interconnectors. How does the Minister see this conundrum playing out as we move to the more contractual counterparty model used for contracts for difference?

The position of existing nuclear power is also somewhat curious. It is included in the list of qualifying plant for the capacity market yet these nuclear plants have already been built, are already generating and are receiving revenues for electricity that will not be hit by carbon pricing. Has the Minister reflected that nuclear plants can now enter the capacity market, even though industry is intended to finance the cost of upgrade and life extension work? As the Minister knows, subsidy will find its way back in the end to bills that the consumer pays.

The Explanatory Memorandum also mentions that as the capacity market is intended to be a transitional measure, regular reviews of the capacity market will take place. Has the Minister any view on how often these regular reviews and audits should be taking place? As each year’s auction will clarify progress on a number of eventualities and be subject to demand-side and storage transitional arrangements, as mentioned in the Minister’s remarks, does she envisage that they would best be undertaken yearly?

The Minister will also be aware that carbon impact policies do not apply to plants producing less than 20 megawatts. This will give a cost advantage to plants conveniently bidding on providing 19 megawatts. Will the Minister outline the rationale for that defining level as oil plants, being perhaps among the most polluting forms of generation, will tend to be at a sub-20 megawatt level? In the expectation of her fulsome replies and clarifications, I am in support of these regulations today. In the spirit of Christmas, I look forward to congratulating the Minister on a successful auction next week. We will have the joy of experiencing it in the announcement of the results by National Grid early in the new year.

Baroness Verma: I start by thanking the noble Lord, Lord Grantchester, for what was, I think, his general support for the draft regulations. Of course, he reminded

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me of the hard work that the Committee undertook during debate on what became the Energy Act 2013. I was extremely grateful for the noble Lord’s participation in ensuring that the level of scrutiny that took place really did enhance the Bill as it moved through to become an Act.

As always, the noble Lord, Lord Grantchester, asked a large range of questions and before I continue, if I fail to answer any of the questions that he posed, I will of course read Hansard carefully, and I undertake to write to him and place a copy in the Library.

The noble Lord asked about the period of reviews. Reviews will be undertaken yearly by Ofgem and every five years by the Government. It is important that we ultimately deliver the right formula to ensure a value-for-money cost to the consumer. I know that ultimately the noble Lord and I share the primary object of ensuring that not only do we have enough supply but that it provides value to the consumer.

4.30 pm

The noble Lord also asked what suppliers thought of mutualisation of the costs in the event that one supplier fails to pay. We have consulted with suppliers on charging arrangements and they accept that mutualisation is necessary in order to provide the necessary certainty that capacity payments will be made to providers. This reflects cost recovery mechanisms in similar organisations elsewhere. It is not unique to the proposal we are putting forward here.

The noble Lord asked what dispute mechanisms were in place in relation to the data used or the calculations carried out. The majority of data used for settling the capacity market comes from existing industry processes established by the balancing and settlement code. So, again, we have evidence available from resources already in place.

The noble Lord also asked about electricity suppliers’ charges being based initially on their own estimates. The payment methodology ensures that, in all instances, 100% of the necessary costs can be collected. This is an important objective. We opted not to create a penalty on suppliers for inaccurate estimates because of the additional complexity that that would create. The challenge, of course, as the noble Lord is aware, is to achieve this in a fair manner. We do not want to have unintended consequences on suppliers just because a new mechanism is being put into place.

4.32 pm

Sitting suspended for a Division in the House.

4.47 pm

Baroness Verma: My Lords, I will continue with my responses to the noble Lord, Lord Granchester. He asked about interconnectors. As he mentioned, we announced the interconnected capacity, which will participate in the market from 2015. We will bring forward amending legislation and an impact assessment in the new year that will address the points the noble Lord raised about interconnectivity.

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The noble Lord also asked about existing plant such as nuclear and asked why it was being allowed to partake in the auction. The purpose of the capacity market is to ensure that we have secure energy—that the lights do not go off. That means that we need to ensure that all forms of capacity are able to take part in the system. However, it is open to best value: of course the capacity market is there to generate competition, but also to ensure that we have enough supply to keep the lights on. I think the noble Lord will of course agree that those established technologies have a lot of upfront costs when they build, so a lot of other costs are associated with the traditional sector and we should not exit them out just because they have already built and are partaking. However, nuclear offers a low-carbon energy supply, and I think the noble Lord will agree that that is also a necessary need to fulfil, as well as ensuring that the lights stay on.

The noble Lord asked about carbon impact policies and the advantage for plants that are bidding at the 19-megawatt ratio. I would like to reassure the noble Lord that we will be reviewing the outcome of the first auction to ensure that it is a fair process and that we do not unintentionally benefit one form of supply over another.

This debate has been important and I do thank the noble Lord for his questions, which have allowed me to illustrate the fairness of the system—but again, as with all things, we will make sure that we are reviewing the process as we go along. I would also like to put on record that I hope that the noble Lord gets an opportunity over the Christmas period to take some time off and rest, because I know that he works extremely hard, as do his colleagues, in challenging the Government—which is only right and enables us to produce better legislation. I commend the draft regulations.

Motion agreed.

Keeping and Introduction of Fish (England and River Esk Catchment Area) Regulations 2015

Motion to Consider

4.51 pm

Moved by Lord De Mauley

That the Grand Committee do consider the Keeping and Introduction of Fish (England and River Esk Catchment Area) Regulations 2015.

Relevant document: 13th Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con): My Lords, in introducing these regulations I disclose an interest as owner of a stretch of a tributary of the River Thames and an interest in a lake used—among other things—for fishing.

Diseases and parasites of fish in the wild can, of course, adversely impact fish stocks. Non-native invasive fish species also pose a significant threat to native

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species through predation and competition as well as being potential carriers of diseases and pests, with additional potential impacts on the biodiversity of habitats. These present risks to the environment and to commercial and recreational fishery waters, so the stocking of fish into inland waters for recreational angling and other purposes has to be balanced with appropriate safeguards for aquatic environments.

Under these regulations a new permitting scheme will enable the regulatory body and the Environment Agency to adopt a risk-based approach to managing the introduction and keeping of fish in our rivers, lakes and waterways. This will reduce burdens on the angling and freshwater fisheries sector and help promote growth in the rural economy. The legislation, subject to the approval of Parliament, will be made under Section 232 of the Marine and Coastal Access Act 2009. These regulations would repeal Section 30 of the Salmon and Freshwater Fisheries Act 1975 in relation to England. We will shortly also modify the Prohibition of Keeping or Release of Live Fish (Specified Species) (England) Order 2014 so that its scope excludes inland waters, to prevent the duplication of legislation.

The proposed regulations introduce a new permitting scheme which would replace the existing legal requirements to obtain the consent of the Environment Agency for each separate introduction of any fish into inland waters, and to obtain a licence for the keeping and release of non-native fish in inland waters. These regulations would make it an offence to keep fish or introduce fish other than in accordance with a single permit granted by the Environment Agency. The Environment Agency will also have the power to impose conditions on the permits relating to matters such as the number of fish introduced and minimising the risk of fish escaping from inland waters.

The new permitting scheme will enable the Environment Agency to adopt a risk-based approach to managing the introduction and keeping of fish. Under this proposal, species that are high-risk are given greater scrutiny while the movement of low-risk species will be allowed to take place more freely. This is a significant improvement on the current system. The Environment Agency will also be able to revoke and vary permits if information comes to light that changes the level of risk the fish pose to the environment. The regulations also provide more effective enforcement powers to enable the Environment Agency to remove illegal non-native fish where they are found in rivers, lakes and waterways.

The Government consulted on these proposals both in 2009 and as part of the water and marine-themed Red Tape Challenge in 2012. As explained in the accompanying Explanatory Memorandum, most respondents supported the proposals. These regulations would produce a small annual saving for industry and additional savings for the Environment Agency.

The Keeping and Introduction of Fish (England and River Esk Catchment Area) Regulations 2015 will also apply to the Border Esk region of Scotland. Freshwater fisheries are best managed on a river basin catchment basis, and England’s Environment Agency has managed fisheries in the Border Esk region for many years. Under similar arrangements, Scotland

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manages freshwater fisheries in the River Tweed catchment, which is shared with England. The Scottish Government are fully aware of these regulations, which maintain this policy approach, and are in total support of them.

In summary, the Government consider that the approach set out in these regulations will provide a more efficient and risk-based way of protecting local fisheries and biodiversity. They will reduce the regulatory burdens on the angling and fish trade industry. To this end, I commend these regulations to the Committee.

Lord Grantchester (Lab): My Lords, I thank the Minister for his explanation of the regulations before the Committee today. I declare my interests as a farmer in Cheshire—the River Weaver defines the farm’s boundary on one side—and as a co-owner of a holiday home in south-west Scotland with fishing rights, although I do not personally partake in the catching of little fishes. I know that there have been many expressions of anxiety concerning the Scottish Government’s upheaval of the governance and jurisdiction structure of inland fishing in Scotland, but that is not a subject for debate today.

Nevertheless, as far as these regulations are concerned, it is good to see that co-operation between the Scottish and United Kingdom Parliament is healthy and continuing. As the Minister stated, these regulations replace the current controls on placing fish into inland waters with a new permitting system, requiring all introductions and subsequent keeping of fish to be permitted by the Environment Agency. Transporting fish for introduction must also be permitted. The main objective should be achieved, which is to support the economic value and growth of the angling sector while ensuring adequate risk-based protection for the aquatic environment from risks associated with the use of invasive non-native fish species. Such high-risk species will be given greater scrutiny, while low-risk fish movements will be allowed to take place, as the noble Lord said, much more freely, albeit against the background of full disease control and other measures the Environment Agency will rightly be concerned with. That a permit is not necessarily set in stone for all time but will run until varied is surely the right approach.

Your Lordships’ Secondary Legislation Scrutiny Committee inquired why the department had taken so much time since the public consultation concluded in March 2010 to come forward with these quite modest and uncontroversial regulations. It is interesting that the answer was that the election in 2010 gave rise to the regulations having to be fully evaluated against the new Government’s priorities, and that further delay then flowed from the requirement to reconsult under the water and marine Red Tape Challenge initiative. It is very fortunate that the noble Lord brings these regulations before the Committee today, a mere few months before maybe further inevitable delay as a result of the much anticipated change of Government at the general election next May.

I ask the Minister to provide comfort to the Committee. Is he confident that, following this change in licensing, there are adequate plans in place to deal with any outbreak, emerging disease or damage that could result

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from any eventuality in the future? Are there enough resources to remove any introduction from the environment affected and to tackle any problems resultant from illegitimate action or trade? I note that one of the contentions expressed in the consultation was that this new scheme might lead to an increase in illegal activity.

5 pm

Can the Minister also confirm that the threshold of 0.4 hectares set for the size of the inland waterway will remove any inclusion of garden or domestic ponds from these regulations? I understand that the Committee may need to look further, in due course, at another regulation covering trade in ornamental species.

I note that in the regulations there is no mention of cost recovery. Indeed, paragraph 53 of the Explanatory Memorandum states that at present there are no charges for the issuing of consents and currently no intention to introduce these charges. Nevertheless, while the size of the cost savings from the introduction of this new scheme is very small, and the costs to business and administrative costs are largely immaterial, can the Minister comment on whether the Environment Agency will necessarily look at cost recovery to every service it provides and how it will assess whether to introduce cost recovery in each instance? Meanwhile, I am happy to support the regulations.

Lord De Mauley: My Lords, I thank the noble Lord, Lord Grantchester, for his helpful and positive points on the regulations. As he points out, we are committed to protecting our environment, including the native fish and fauna in our rivers, lakes and waterways, while at the same time reducing burdens on industry, where these have been identified, in line with our invasive non-native species framework strategy for Great Britain.

The noble Lord asked three questions. First, in relation to the introduction and keeping of fish in garden ponds, I confirm that the statutory instrument will apply to inland waters such as lakes and rivers, which includes small lakes and large ponds over 0.4 hectares, as he said. The keeping of non-native fish in ponds below that size will be regulated through the Prohibition of Keeping or Release of Live Fish (Specified Species) (England) Order 2014. However, he will be comforted to know that the keeping of common non-native ornamental species such as goldfish does not require a licence.

The noble Lord also asked about cost recovery. In the first year of the scheme, the costs to the Environment Agency will modestly increase. Savings will take effect fully in later years, while future funding decisions will be for the next comprehensive spending review. That is about as far as I can go today. As time goes forward, we will look at cost recovery in different areas. No decisions have yet been made and there will be more consideration of that issue.

Lastly, the noble Lord asked whether I was confident that adequate plans and resources were in place to cover outbreaks of diseases. He puts his finger on one of the most important matters that we

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address in Defra. We constantly keep an eye on this and, indeed, Ministers meet regularly to discuss it with representatives of all the various bodies that help us with animal and plant diseases, invasive non-native species and so on. We try to look at these matters holistically and in the round. We now take a more strategic approach than we did in the past and I am confident that we have a comprehensive plan and resources in place to do that. Of course, that is not to say that we will never face another disease or pest again, and the business of Defra is in responding to crises. However, in this regard, I can say that this new risk-based permitting scheme, managed in an effective and efficient way by the Environment Agency, will ensure we continue to protect our local fisheries and the environment while allowing the angling and fish trade industries to flourish.

Motion agreed.

Water Industry (Specified Infrastructure Projects) (English Undertakers) (Amendment) Regulations 2014

Motion to Consider

5.05 pm

Moved by Lord De Mauley

That the Grand Committee do consider the Water Industry (Specified Infrastructure Projects) (English Undertakers) (Amendment) Regulations 2014.

Relevant document: 14th Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con): My Lords, these draft amendment regulations before the Committee today will amend the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013. The SIP regulations, as they are known, concern the provision of large or complex infrastructure for the use of water or sewerage undertakers.

The main purpose behind these amendments is to give Ofwat the power to include conditions in an infrastructure provider’s project licence that allow for matters or questions to be referred to the Competition and Markets Authority for determination. This will give infrastructure providers the same right as water and sewerage undertakers to require Ofwat to refer its price control decisions to the CMA.

Extending Ofwat’s power to include such conditions will ensure that any potential future disputes between the Water Services Regulation Authority—Ofwat—and an infrastructure provider are resolved promptly. That should minimise the time-related costs of such disputes, which are ultimately met by customers, and will help to keep water and sewerage bills as low as possible.

The SIP regulations came into force in June last year and implement Part 2A of the Water Industry Act 1991. They give the Secretary of State and Ofwat the power to specify, by notice, large or complex water or sewerage infrastructure projects in certain circumstances: in particular, where the specification of the project is considered likely to deliver better value for money for taxpayers and customers.

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Once specified, the relevant undertaker has to procure competitively a separate infrastructure provider to finance and deliver the project. After the successful bidder is designated as “the infrastructure provider”, Ofwat may then grant it a project licence, regulating it under a bespoke regime set out in the SIP regulations. A separate Ofwat-regulated infrastructure provider provides an objective means of testing whether the financing costs of a project are appropriate and reasonable, and allows the Government to target any financial support more effectively.

Following public consultation, the Secretary of State specified the Thames tideway tunnel project as an infrastructure project on 4 June this year. Thames Water Utilities Limited, as the incumbent undertaker, subsequently put the delivery and financing of the bulk of the tunnel works out to tender on 10 June. The tendering process is under way and expected to conclude in the summer of next year. This is the first and currently the only infrastructure project to be specified under the SIP regulations.

The proposed amendments would bring Ofwat’s powers relating to licensed infrastructure providers into line with those which already apply under the Water Industry Act 1991 as regard English water and sewerage undertakers. They would allow Ofwat to include certain conditions in an infrastructure provider’s project licence, giving the infrastructure provider the right to ask Ofwat to refer certain questions relating to its project licence to the CMA for determination. The proposed amendments would give an infrastructure provider the same right that water and sewerage companies already have to require Ofwat to refer its price control decisions, such as on interim determination of price limits or an increase in allowed revenue, to the CMA.

Without the proposed amendments, the only way for an infrastructure provider to challenge Ofwat price control decisions would be to seek judicial review on a point of law before the High Court. This is a time-consuming and expensive process, the costs of which are ultimately met by customers.

The statutory consultation on the draft regulations ran for six weeks, between 28 July and 8 September 2014. Its purpose was to inform those who represent interests likely to be affected by the regulations. The consultation was based on the GOV.UK website, and it was open to members of the public to submit their comments. Invitations for comments were also issued by e-mail to 324 interested organisations and individuals, including the CMA, Ofwat, the English water and sewerage undertakers, the Consumer Council for Water, Members of Parliament in London and the Thames Water region, members of the Greater London Assembly, and the Mayor of London. Five responses were received and a summary was published on the GOV.UK website last month.

We have noted the range of views and comments received on the proposed amending regulations and those relating more generally to the Thames tideway tunnel project. As a result, we have adopted some drafting points raised during that consultation in the amending regulations and are proceeding with the draft regulations. I commend them to the Committee.

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Lord Grantchester (Lab): My Lords, these are the regulations we have all been waiting for. I thank the Minister for his introduction to the instrument before the Committee concerning the amendments to the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013.

From this side of the Committee, we support these changes to the SIP regulations. As the Minister has explained, their purpose is to bring Ofwat’s powers to include conditions in an infrastructure provider’s project licence into line with those which exist for a water or sewerage undertaker. With this inclusion, Ofwat is able to refer any disputes over price determinations to the Competition and Markets Authority on request by the licensed IP, in the same way that a water or sewerage undertaker already can. In the absence of such conditions, as the Minister said, the only route of challenge against an Ofwat determination would be by an application for judicial review on a point of law—a costly and time-consuming activity.

The SIP amendment regulations concern infrastructure providers in their activity of financing and delivering large and complex projects, most notably the Thames tideway tunnel. The SIP regulations are entirely sensible. The public consultation recently undertaken produced the five responses to which the noble Lord referred. The purpose of the consultation was not to review the merits of the tunnel but to consider amendments to the SIP regulations. Although most of the points raised were on aspects of the tunnel project itself, and not relevant to the consultation, nevertheless the respondents were supportive of the draft SIP amendment regulations on the grounds that the availability of an appeal route in common with other water industry companies will help lower perceptions of project risk and keep the cost of procuring a proposed IP as low as possible. It would so remove a distinct disincentive to invest and enable any potential future disputes to be resolved promptly.

I am sure that the use of the CMA to adjudicate will be helpful in convincing consumers that the decisions reached have their best interests at heart. The removal of an unnecessarily burdensome process for the appeals should also help to deliver lower costs for consumers. I see no reason to delay further the Committee’s agreement to these regulations.

Lord De Mauley: My Lords, I am grateful to the noble Lord for his comments.

Motion agreed.

Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2014

Motion to Consider

5.14 pm

Moved by Lord Popat

That the Grand Committee do consider the Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2014.

Relevant documents: 14th Report from the Joint Committee on Statutory Instruments, 15th Report from the Secondary Legislation Scrutiny Committee

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Lord Popat (Con): My Lords, the recruitment sector plays an important role in the labour market by matching demand for jobs to demand for workers. The sector is regulated by the Employment Agencies Act 1973 and the conduct regulations. The legislation covers all employment agencies and employment businesses in Great Britain, providing a framework for contracts between agencies, hirers and work-seekers. It also restricts fee charging and ensures that temporary workers are paid for the work they have done.

However, the legislation does not currently regulate where employment agencies place advertisements for vacancies. The Government are concerned that some agencies may be advertising British-based jobs in other European Economic Area countries without advertising those jobs in Britain. This means that workers in Britain do not always have the opportunity to apply for jobs that are based here. We believe this is wrong.

In The Plan for Growth, the Government set out their ambition to create a competitive and supportive business environment that allows businesses to establish themselves, to grow and to employ people. An important part of this ambition is the need to achieve a strong and efficient labour market—a labour market that gives people opportunities to find jobs that are right for them and allows employers to access the type of labour that matches the skills they need.

To fulfil this, we need to achieve a labour market that is flexible, effective and fair, and which encourages job creation and makes it easy for people to find work and stay in work. The Government believe that overseas-only advertising undermines the fairness of the labour market. It reduces the job choices available to people in Britain and for businesses that are hiring it also limits their choice of candidates. We want to do something about this. We want to ensure that people in Britain have the opportunity to enter the workplace, especially the young and the unemployed. We want to create a level playing field for workers in Britain.

Overseas-only advertising is already potentially a breach of the Equality Act 2010. However, the proposed regulations would go a step further by creating a specific requirement to advertise jobs in Great Britain and in English.

The proposed change to the conduct regulations would require agencies to ensure that if they want to advertise vacancies elsewhere in the EEA, they must also advertise in Great Britain and in English. The new regulations would apply to all employment agencies and employment businesses in Great Britain that find permanent and temporary work for people. It will apply only to vacancies advertised in European Economic Area countries; UK Immigration Rules already favour native workers over non-EEA workers. Each position has to undergo a resident labour market test before it can be advertised outside the EEA. We are not proposing to stop agencies from advertising jobs overseas or in additional languages. They will still be free to do so if they wish, as long as the vacancy is also advertised in Great Britain.

In addition, in the rare circumstances where it would make little sense to advertise a vacancy in English in Great Britain—for example, if there is a genuine requirement for a native foreign language

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speaker for a particular role—a defence will be available. However, in general, if agencies choose to advertise jobs overseas, they would need to ensure that those jobs are also advertised in Great Britain, either at the same time or in the period of 28 days prior to advertising the vacancy overseas.

We believe that this will expand the range of job opportunities open to people in Great Britain and will also expand the range of people from which businesses can choose. The new regulations would be enforced by the Employment Agency Standards Inspectorate, which enforces the conduct regulations. Agencies would need to demonstrate, through record-keeping, that they have complied with the requirements to advertise the vacancy, or vacancies, in Great Britain and in English.

Subject to the proper parliamentary process and necessary scrutiny, it is our intention that this change will come into force by the end of this year. I hope that the Committee will therefore support this statutory instrument.

Baroness Donaghy (Lab): My Lords, I shall be brief. On a quick glance, these seem to be sensible suggestions. I know how unpopular this is when it is blown up in the newspapers that British jobs are being advertised in Polish in Poland. I suspect that it is not as big a problem as newspaper controversies suggest. I am not convinced that the order will make much difference but, nevertheless, its spirit and intentions are good.

I have two questions. First, will the Employment Agency Standards Inspectorate be sufficiently well staffed to undertake the job required of it? Secondly, given the internet and the fact that people can pick up jobs wherever they are in the world, how much difference will this make in restricting the ability of employment agencies and businesses from getting their own way by the back door?

Lord Young of Norwood Green (Lab): My Lords, I, too, welcome the measures brought forward by the Government today. It is important that jobs in the UK are advertised and made available to the people who live and want to work here. Indeed, we have already called on the Government to ban agencies from recruiting solely from abroad. However, Ministers are failing to go further to tackle the real problems in the employment agency sector and to halt the exploitation of Britain’s 1 million agency workers.

Agency working can provide flexibility that works for employers and employees, but the main recruitment industry body has warned that the number of rogue agencies has increased over the past three years. These agencies are associated with the worst elements of insecurity in our labour market, including the undercutting of wages and non-payment of the minimum wage. There is evidence that they are marketing agency workers to employers as a way to undercut wages of permanent staff, exploiting agency workers with unfair and illegal charges for travel, accommodation and taxes, in some cases leading to non-payment of the minimum wage, and engaging in tax avoidance schemes.

To reiterate, it is not only us who are saying this. The main industry body for the recruitment sector has warned that the problem of rogue agencies associated

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with non-payment of the minimum wage is getting worse. Regulatory bodies, including the Employment Agency Standards Inspectorate and HMRC, have also found evidence of non-payment of wages and of tax avoidance schemes. I would obviously welcome the Minister’s comments on that.

If we are in government after next May, we will crack down on employment agencies to tackle the worst elements of insecurity in our labour market. The next Labour Government will close loopholes which allow employment agencies to undercut the wages of permanent staff, ban employment agencies from recruiting only from abroad and force rogue agencies illegally exploiting their workers to clean up their act through measures such as the introduction of a licensing system.

We will not tolerate a world of work that is becoming more brutal because of the way in which cowboy employment agencies have been allowed to operate. They are undermining dignity at work, driving down standards and creating greater insecurity for families. I endorse the comments of my noble friend Lady Donaghy in relation to the internet and so on. I apologise for not being in my place at the start of the debate. I had not anticipated that we would get through the previous statutory instruments quite so quickly.

Lord Popat: I thank the noble Baroness, Lady Donaghy, and the noble Lord, Lord Young, for their brief contributions to this debate. In response to the point made by the noble Baroness about inspectors, we are doubling EAS resources this financial year, with a view to increased resources for the financial year 2015-16. These additional resources will be used for targeted enforcement in high-risk areas to protect the most vulnerable agency workers. The noble Baroness also mentioned internet advertising for jobs, which is not just in the UK but worldwide. Most internet advertising is obviously in English as well.

The noble Lord, Lord Young, mentioned the minimum wage. He is quite right that there are a few companies which abuse the system and do not pay the minimum wage. We have in fact boosted the resources available for national minimum wage enforcement. In the new year, we will have the Small Business, Enterprise and Employment Bill, which I will be taking through the House along with the noble Baroness, Lady Neville-Rolfe. We are going to increase the penalty for people who abuse or break the minimum wage law from £5,000 to £20,000 by secondary legislation. This penalty will be applied not per company or on a per notice basis, but

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on a per worker basis. So we are doing something to ensure that companies do not break the national minimum wage law and that their workers are correctly paid. We will wait for that Bill to come through but, having said that, we have made a couple of amendments recently to make sure that people are paid the minimum wage.

Lord Young of Norwood Green: What plans, if any, do the Government have for dealing with these rogue agencies that the main agencies within the recruitment sector are saying exist? Are the Government making any special efforts to shut them down?

Lord Popat: Most agencies comply with the regulations but, although it is not a widespread practice as such, I agree that there are a few which do not. Hence we have these regulations coming in and we are doubling the number of inspectors. We have inspectors availableto monitor them and to make sure that they do not break the law. We want to make sure that there is fair play and that British agencies advertise jobs in Britain as well as overseas.

I will just cover another point that the noble Lord, Lord Young, made. The subject of overseas-only advertising was raised and how we know it is a problem. The Government have received some complaints about employment agencies advertising jobs in the European Economic Area countries but not in the UK. These regulations will ensure that all agencies based in the UK give work-seekers a fair opportunity to apply for jobs in the UK.

I hope that I have covered all the points—unless there are any further ones—but if I have left out something I will be very happy to write to noble Lords. This change will level the playing field for workers in Britain. It will ensure that they have equal access to vacancies advertised by agencies and that the small number of agencies who deny job opportunities to workers in Britain will be subject to enforcement action, as I mentioned earlier. I am delighted that the Committee is more or less in agreement with these regulations. I know that issues were raised about the minimum wage and internet advertising. I hope that I have covered those but if I have not, I will make sure that officials drop a line to noble Lords on those subjects. I commend these regulations to the Committee.

Motion agreed.

Committee adjourned at 5.29 pm.