The defence industrial strategy published in September made it clear that we are in a new era of threat, which demands a new era for UK defence. As we move to warfighting readiness, it is essential to ensure that our defence programmes are delivered on time. The House will be aware that we inherited forces that were hollowed out and underfunded—47 of 49 major defence programmes were over budget and delayed when we took office. The measures that I am introducing today will increase our readiness by incentivising on-time delivery or projects that support our frontline forces and defence operations.
Our defence industry is crucial to ensure the resilience of our supply chains, the strength to resist threats or disruptive events, and the ability to scale-up and surge capacity as needed. We are committing to the largest sustained increase in defence spending since the end of the cold war, and with a promise to invest more comes a responsibility to invest better. For too long, defence procurement has been burdened by waste, delay and complexity. Yet today we know that whoever gets new technology to the frontline first wins. Business as usual is not an option.
The defence industrial strategy set out the requirement for a dynamic and innovation-focused industrial base that assures UK sovereignty, operational advantage and freedom of action. It went on to say that, to achieve this, we must ensure that the commercial tools we deploy incentivise investment and efficiency. This included a review of the Single Source Contract Regulations, which govern some of the nation’s largest and most strategically important defence procurements and account for around half of defence spending on equipment.
I am today announcing the first tranche of legislation that we will make as part of that review. The focus of these changes is to increase the incentives on our single-source suppliers to meet the pressing need to innovate, get more equipment to the frontline faster and maximise the military capability from every pound we spend. I am therefore today laying a statutory instrument to increase the amount of profit available for delivering priority outcomes, such as faster delivery or greater productivity, from 2 percentage points to 10 percentage points. Whether to include such an incentive fee in a particular contract, and its size and structure, will be at the Government’s discretion, within robust statutory constraints. In general, the Government will be expecting exceptional performance in return for the higher rate of incentive profit.
I am also announcing that we will be decreasing the starting profit on contracts that are low-risk, either because they are in lower-risk sectors or because the Government agree to meet all of the supplier’s reasonable costs. This will allow us to powerfully incentivise suppliers to become more productive or to deliver other Government priorities, in order to restore profits to current levels. It will also motivate suppliers to take on more risk- bearing contracts, which is a defence industrial strategy commitment.
I am also introducing reforms that will support our efforts to increase direct spend with UK small and medium-sized enterprises. While the regulations are critical to securing value for money on large, complicated contracts, they can deter smaller, more innovative companies from becoming defence suppliers. Small and novel products, which have gone from factory to frontline in a matter of weeks, have often delivered the greatest successes. It is vital that we continue to maximise results from our small and medium-sized enterprises. We will therefore increase the threshold for a contract coming under the regulations from £5 million to £25 million. This will remove nearly all small and medium-sized enterprises from the regime in the future lifting a recognised regulatory burden and backing small businesses.
We will also be encouraging innovation by introducing an “innovation uplift” to ensure that firms that invest in innovative technologies are properly rewarded for the risk that entails. It will be payable where suppliers invest their own money in developing products without a guaranteed contract or up-front Government funding.
These changes will be brought in through a further statutory instrument prior to the summer recess.
The reforms being established by the NAD—national armaments director—group reflect a deliberate shift in how the Government use the regulations to drive supplier behaviour.
In single-source dominated businesses, suppliers have historically been able to generate strong returns without the performance pressure that competition creates.
These changes are designed to emulate this pressure by making earning strong profits dependent on delivering the outcomes and value the Government need. They draw on feedback from industry and the Single Source Regulations Office and support the NAD group’s wider mission to accelerate procurement and ensure that critical capabilities are delivered to UK war-fighters faster.
[HCWS1564]