Minister for Defence Readiness and Industry (): The Defence Industrial
Strategy (DIS) 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 war fighting readiness, it is essential we ensure our
Defence programmes are delivered on time. The House will be aware
that we inherited forces that were hollowed out and underfunded.
Forty-seven of forty-nine major Defence programmes were over
budget and delayed when we took office. The measures 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 whoever gets new technology to
the frontline first wins. Business as usual is not an option.
The DIS 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 the commercial tools we deploy
incentivise investment and efficiency. This included a review of
the Single Source Contract Regulations, which governs some of the
nation's largest and most strategically important defence
procurements and accounts for around half of defence spending on
equipment.
Today, I am 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 front
line 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 agrees to meet all
of the supplier's reasonable costs. This will allow us to
powerfully incentivise suppliers to become more productive or
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 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 we continue to maximise results from our small and
medium enterprise. 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 Size
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 National Armaments Director
(NAD) Group reflect a deliberate shift in how the Government uses
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 emulate this pressure by making
earning strong profits dependent on delivering the outcomes and
value the Government needs. 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
critical capabilities are delivered to UK Warfighters faster.
