This document is circulated in confidence for Committee use only and
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Chris Salmon Percival, House of Lords, London SW1A OPW
DPRR/13-14/82
DELEGATED POWERS AND REGULATORY REFORM COMMITTEE
DEFENCE REFORM BILL
Note by the Legal Adviser
1. The Bill had its second reading on 10 December. Part 1 of the Bill makes
provision for allowing defence procurement services to be provided under
contract to the Secretary of State, with associated provision for (amongst other
things) the transfer of employees from the Defence Equipment and Support
organisation, the provision of financial assistance to the contractor and the
conferring of exemptions. Part 2 creates a regulatory framework for defence
procurement contracts where the award is not the result of a competitive
process. Part 3 makes provision about reserve forces.
2. The Ministry of Defence has prepared a memorandum for the Committee
explaining the delegated powers in the Bill. The Bill contains a range of delegated
powers, primarily in Part 2. The powers I deal with below are the ones which in
my view warrant the Committee’s attention.
SCHEDULE 1, PARAGRAPH 4 – POWER TO GRANT EXEMPTIONS
FROM THE HEALTH AND SAFETY ACT 1994
(Page 34 of the Bill; memorandum at pages 5 and 6)
3. Schedule 1 to the Bill makes provision for conferring exemptions from legislation
for premises which are used by a contractor in connection with providing
defence procurement services to the Secretary of State. Paragraph 4 of Schedule
1 confers an order making power on the Secretary of State to exempt a
contractor from the provisions of Part 1 of the Health and Safety Act 1974. This
will include the provisions of that Act which require the contractor to ensure
the health, safety and welfare at work of all employees, and to conduct their
business in a way that ensures that persons not in their employment are also not
exposed to risks to their health or safety. However, there are restrictions on
the circumstances in which the Secretary of State may exercise the order making
powers under paragraph 4. An order under paragraph 4 may only be made to
exempt a contractor from a provision of the Health and Safety at Work Act
1974 (other than one relating to enforcement) if it appears to the Secretary of
State to be necessary or expedient to do so in the interests of the safety of the
State (see paragraph 4(2)). An order under paragraph 4 is to be made by
statutory instrument subject to the negative procedure.
4. The memorandum explains the reasons for including this delegated power. The
exemptions from the Health and Safety at Work Act 1974 are at the moment
capable of being applied to Defence Equipment and Support as part of the MOD,
and in the event that the activities of the DE&S are contracted out it is
considered necessary to have the ability to extend the exemptions to the
contractor.
5. There is a precedent for the order making power in paragraph 4. A similar
power exists under the Atomic Weapons Establishment Act 1991 to exempt
designated premises and activities of a contractor under that Act in connection
with the development, production or maintenance of nuclear devices or with
research into such devices or their effects. In that case, the order is not subject
to any parliamentary procedure. In the light of that precedent (albeit one which
arose before the Committee existed), the Committee may take the view that the
negative procedure offers an appropriate level of parliamentary scrutiny.
PART 2 – SINGLE SOURCE CONTRACT REGULATIONS
(Bill pages 9 to 28)
6. Part 2 of the Bill makes provision about contracts entered into by the Secretary
of State for procuring goods or services for defence purposes where the award
of the contract is not the result of a competitive process. The new framework
replaces an existing regime known as the Government Profit Formula and its
Associated Arrangements (or more colloquially “the Yellow Book”). Although
not legally binding, the Yellow Book has become custom and practice in relation
to single source contracts in the area of defence procurement.
7. Part 2 contains detailed provisions about the pricing of contracts (see clauses 15
to 21). It also contains provisions about the records which are to be kept by the
contractor and others in relation to the contract and provides for reports to be
made to the Secretary of State and the Single Source Regulations Office (SSRO),
the body established to regulate single source contracts under Part 2. Part 2
includes provisions which allow the Secretary of State to give a person a penalty
notice for a failure to comply with the records and reporting requirements.
8. Part 2 is largely enabling in that, rather than setting out the provisions which are
to apply, it requires those provisions to be set out in regulations. However in
doing this the Bill is generally very specific about the matters which are to be
included in the regulations. Clauses15 to 18 and 21 set out in detail the
provisions which are to be included in the regulations about the pricing structure
for qualifying defence contracts. Clause 23 similarly contains detailed provisions
about the records which a contractor is to be required to keep and the access
which is to be given to the Secretary of State to those records.
9. No explanation is given for adopting the approach of requiring the substantive
provisions for the regulation of contracts under Part 2 to be contained in
regulations, although it may reflect a desire to ensure that provisions setting out
the regime for such contracts are all in one place. The Bill provides for
regulations under Part 2 to be subject to the negative procedure. The reason
given in the memorandum for this level of parliamentary scrutiny is the fact that
Part 2 deals with matters which are technical and uncontroversial. It seems to
me that this level of parliamentary scrutiny is justifiable because of the extent to
which the primary legislation specifies the provisions which are to be contained
in the regulations. Thus, while the Bill provides for areas of discretion in relation
to the provisions which may be contained in regulations under Part 2, the
primary legislation to a large extent specifies the actual provisions which are to
be included in the regulations. Nevertheless, the Committee may want to
consider whether because this is the first time statutory provision is being made
for regulating single source contracts in a defence context, the regulations should
be subject to a first time affirmative procedure.
CLAUSES 14(1) AND 28(1) – POWER TO MAKE REGULATIONS
RELATING TO QUALIFYING DEFENCE CONTRACTS AND
QUALIFYING SUB-CONTRACTS
(Bill pages 9 and 19)
10. Clause 14(1) provides that the Secretary of State may by regulations under Part
2 make provision in relation to contracts to which that Part applies. Other
provisions of Part 2 set out specific matters which may be dealt with in
regulations under that Part. What is not clear is the relationship between the
power to make regulations referred to in clause 14(1) and the other more
detailed powers to make regulations under Part 2. In particular it is not clear
whether clause 14(1) is merely introductory, whether it is intended (through the
use of the word “may”) to indicate that the power to make regulations under
Part 2 is discretionary, or whether it is intended to confer a general power to
make regulations about qualifying defence contracts which goes beyond the
specific powers conferred by other provisions of Part 2.
11. Nothing is said in the memorandum about clause 14(1) which may suggest that it
is not intended to have any legal effect apart from defining “single source
contract regulations”. If that is right, then the Committee may take the view that
the legislation should be amended to make this clear. If on the other hand, the
intention is to confer a power to make regulations which extends beyond the
powers conferred by other provisions of Part 2, the Committee will want to
consider whether this is an inappropriate delegation because the scope of the
power is very wide and imprecise, with no explanation given for what it will be
used for.
12. A similar point applies to clause 28(1). That provides for regulations under Part
2 to make provision about qualifying sub-contracts. Again, other provisions of
Part 2 set out specific matters which are to be contained in the regulations about
qualifying sub-contracts, and it is left unclear whether clause 28(1) is merely
introductory or whether it is intended to confer a general power to make
regulations which goes beyond those specific powers. Nothing is said in the
memorandum about clause 28(1).
CLAUSE 14(2) – MEANING OF “QUALIFYING DEFENCE
CONTRACTS” FOR THE PURPOSES OF PART 2
(Bill pages 9 and 10; memorandum at pages 12 and 13)
13. The definition of the contracts (known as “qualifying defence contracts”) which
are subject to regulation under Part 2 is set out in clause 14(2). That clause
provides for key elements of the definition to be set out in regulations. So,
while subsection (2)(a) provides that a qualifying defence contract is a contract
under which the Secretary of State procures goods, works or services for
defence purposes, the meaning of the words “defence purposes” in subsection
(2)(a) is to be given in regulations: see subsection (8). Another feature of a
qualifying defence contract is that its award is not the result of a competitive
process. Again, subsection (6) provides for the question of whether the award is
a result of a competitive process to be determined in accordance with
regulations. Clause 14 also provides for regulations to determine the threshold
value which a contract must be at or above in order to be a qualifying defence
contract (see subsection (2)(b)). It also allows the regulations to specify types of
contract which are automatically excluded from being qualifying defence
contracts.
14. The Ministry of Defence deals with the delegations conferred by clause 14 at
pages 12 and 13 of the memorandum. The memorandum for the most part
explains the need for the delegations contained in clause 14. For example, the
memorandum states that it is necessary to require the question of whether the
contract is awarded as a result of a competitive process to be determined under
regulations because of the need to be consistent with EU procurement rules
which may change over time. Nothing is said however about is why it is
necessary for the expression “defence purposes” in clause 14(2)(a) to be defined
in regulations. It may be that there is a perceived need to retain flexibility in
order to reflect subsequent changes made under EU law to the scope of the
defence exemption from the EU procurement rules. But in the absence of any
explanation in the memorandum, the Committee may consider that the Minister
should be asked to explain why it is necessary to delegate this element of the
definition, particularly as the way in which “defence purposes” is defined is liable
to have a significant impact on the contracts to which Part 2 applies.
15. Regulations under clause 14(2) are to be made by statutory instrument subject
to the negative procedure. The Ministry of Defence explains in the
memorandum that this procedure has been chosen because all the matters dealt
with in the regulations are of a technical nature which are unlikely to be of
interest to Parliament or contentious. The Committee will want to consider
whether this provides adequate justification. The effect of clause 14 is to provide
for significant elements of the definition of the contracts to which Part 2 applies
to be contained in regulations, effectively leaving it to regulations to determine
the contracts to which that Part will apply. The Committee may take the view
that in the circumstances the affirmative procedure is more appropriate.
CLAUSE 19 – RATES RELEVANT TO DETERMINING THE
CONTRACT PROFIT RATE
p(Bill pages 13 and 14; memorandum at pages 15 to 17)
16. Under Part 2 of the Bill the price payable under a qualifying defence contract is to
be determined in accordance with a formula set out in clause 15(4). That formula
provides for the contract price to be the contractor’s allowable costs incurred in
connection with the performance of the contract plus an amount for profit. The
amount for profit is calculated by multiplying the allowable costs by a factor
known as the contract profit rate (CPR). The process for determining the
contract profit rate in each case is set out in clause 17. Aspects of that process
rely on the following rates being determined by the Secretary of State on an
annual basis under clause 19:
a. The baseline profit rate. This is the starting point for determining the CPR.
b. The SSRO funding adjustment. This is an amount which is intended to allow
50% of the running costs of the Single Source Contracts Office to be
recovered from contractors.
c. The capital servicing rates for fixed and working capital. Step 6 in clause 17
requires the CPR to be adjusted by reference to the capital servicing rates for
fixed and working capital so as to ensure that the contractor receives an
appropriate and reasonable return on the fixed and working capital used for
the purposes of performing the contract.
17. In general, powers which are delegated under sections 15 to 21 are required to
be exercised by statutory instrument subject to the negative procedure.
However, the annual determination by the Secretary of State of the rates
referred to above is not required to be set out in a statutory instrument nor is it
subject to any parliamentary procedure. No explanation is given in the
memorandum for the different treatment of the delegated powers conferred by
clause 19. It may be that the Ministry of Defence considers there to be a
difference between the provisions which are to be made by regulations, since
these set out the regime for the pricing of contracts, whereas the rates
determined under clause 19 go to determining the actual amount of the price of
a contract. Thus, the department’s view may be that these are matters which,
since they directly impact on the amount payable under contracts, should be left
solely to the department’s commercial judgment. Nevertheless, the Committee
may wish to consider whether, because the effect of section 19 is to delegate
matters which will apply generally to all qualifying defence contracts, the Minister
should be asked to explain why it is appropriate for those powers to be
exercised without Parliamentary scrutiny.
12 December 2013
Nicholas Beach