Draft Abro Trading Fund Order 2002

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Mr. Edward Davey (Kingston and Surbiton): I agree with much of what the hon. Gentleman says, but does he not think it right that the public sector and the

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Ministry of Defence should keep a core competence for repairing Army vehicles? If not, is he arguing that all that competence should be contracted out?

Mr. Gray: The hon. Gentleman anticipates me. There are good examples of precisely what he describes. The Royal Ordnance factory springs to mind. The United Kingdom's weapon production is entirely contracted out and privatised. No one has suggested that the MOD should necessarily keep it in-house.

The thrust of my questions is not so much about that, but about the fact that ABRO and the MOD—and Ministers—do not seem to have a clear vision. They do not seem to know whether ABRO should be a comparator, a competitor in the private sector or a client of the private sector, or whether the private sector should be one of its clients or whether it should play a role in the DPA. No one seems to know what exactly it ought to do. There seems to be some lack of clarity in their thinking. They cannot then propose such a statutory instrument, or a fund such as that proposed in it, unless they know precisely what they are asking ABRO to do. The Minister needs to allay the industry's concerns about the level playing field. That is a technical accountancy matter, and I hope that he will turn his mind to it.

Other sources suggest that if ABRO is not a comparator, it is—in a great new Labour expression—a strategic partner to the industry. The excellent article produced by the chief executive states:

    ''We have a partnership agreement with Vickers . . . to provide Challenger 2 Base Inspection Repair. We have another with Heckler and Koch to support the SA80 modification programme''.

Incidentally, the Minister omitted to mention Heckler and Koch in one of his helpful parliamentary questions, but he referred to it in his speech today.

We need to know precisely what a strategic partnership is. One can imagine the production of a great coloured brochure about how frightfully important the strategic partnership between ABRO and the private sector is. What on earth is a strategic partnership, what does ABRO bring to it, and how will it be accounted for? Is ABRO a client of the private sector, or is the private sector a client of ABRO? We have heard about the shining new Challenger II overhaul line at Bovington, for example, which was created at some public expense but replicates many of the facilities at the now closed Vickers tank factory at Leeds. Perhaps that factory could have done the job just as well. Would that have been a strategic partnership, with Vickers and ABRO putting a lot of money into producing something at Bovington to replace something that existed perfectly well at Leeds?

Perhaps ABRO is a monopolistic supplier, an in-house repairer for what industry does not want to repair. I think that the hon. Member for Kingston and Surbiton (Mr. Davey) mentioned that subject a moment ago. The Clansman radios spring to mind. No one wants to repair them. No one wants to use them, come to that, but ABRO may be asked to repair them.

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If ABRO is meant for that purpose, why does it need a trading fund? It may be perfectly legitimate for the Government to say that our forces require an in-house repair and maintenance operation that should be paid for out of taxpayers' funds. That is an entirely public sector role, if indeed it is ABRO's role. We do not need a trading fund if that it is what it will do.

Such contradictions and muddles demonstrate that ABRO has no clear purpose, or does not know what its purpose is. Each of the roles mentioned has advocates within ABRO, the Ministry of Defence and elsewhere, but none of them sits easily with what ABRO actually does. Trading fund status will not help to clarify that.

We need Ministers to think strategically and unusually clearly about ABRO's core role. If it is competitively to supply equipment and repair to our armed forces—we suspect that it should be, and the establishment of the trading fund would seem to confirm that—the only truly sensible way to do that would be as an entirely private company. Why not go down the same track as we did with Royal Ordnance plc? Why not say, ''Gentlemen, we require your services. You may form a private company and we will purchase services from you, as may other people and countries. We expect you to make a profit.''

Is the trading fund proposed not akin to the changes to the National Air Traffic Services, over which the Government should have had their fingers burned? I was in this Room not so long ago to debate the privatisation of NATS, and we discovered this week that the Government are forking out £30 million to bail it out. London Underground, Railtrack and a whole variety of—

The Chairman: Order. The hon. Gentleman is going a little wide of the order.

Mr. Gray: You are of course right, Mr. Butterfill. I hope that you will forgive me. It seemed as though there were some parallel with what we are discussing today, which is a halfway house. It is not a clear and straightforward privatisation, and does not set ABRO up commercially or keep it in-house within the Ministry of Defence. When that is coupled with the fact that ABRO and the people who speak for it seem to lack clarity of vision as to what it is for, one lands up with something of a muddle.

We accept the establishment of the trading fund and think that it is a step in the right direction, but are concerned about the lack of clarity. If the purpose of the establishment of the trading fund is to make the agency commercial, why do the Government not go the whole hog and privatise it?

5.4 pm

Mr. Davey: I agreed with many of the remarks of the hon. Member for North Wiltshire (Mr. Gray), but he pressed his case slightly too far. The idea that this move is not important for ABRO and the services that it provides to our armed forces does not hold water. It is a good step. There may be future steps, in the directions that the hon. Gentleman talked about, for the agency to take, but this represents a step in the right direction and we should welcome it.

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I shall start my remarks properly by paying tribute to the staff of ABRO and stressing the importance of their work for our armed forces. Without their expertise, skill, dedication and commitment, the equipment required by many of our soldiers in battle would not be up to scratch. Their work is very important and we should be grateful to them.

I have some concerns about the practicalities touched on by the hon. Gentleman. In particular, I am concerned about surge demand and spare capacity. Presumably, those running ABRO would decide that some capacity would always be needed to deal with UK equipment. Presumably, there would be a work force, either from ABRO or other contractors, dedicated to ensuring that the equipment used in rapid response action was always ready for use and could be serviced in theatre. Presumably, any other equipment that would be needed in the early days of a conflagration would be readily serviceable.

We need to hear from the Minister that there are guarantees concerning such equipment. As we have seen in recent actions abroad involving our forces, a large amount of equipment can be required very quickly. We therefore need to be sure that if, under the new trading fund arrangements that the order establishes, employees of ABRO are working overseas for some other customer, they can be called back at an early stage. All the contracts that are entered into under the new arrangements should have that written into them.

We need to ensure that we protect the vital interests of our armed forces and our country in such circumstances. Although it is right to go down this more commercial route, we need to ensure that any spare capacity is being used and that skills are kept up to date in the use of that spare capacity. Fixed costs should be spread over a wider set of contracts. However, we also need to ensure that that does not in any way jeopardise continuing Government control of the agency, which is the main reason for having such services in the public sector. I hope that the Minister can give us those reassurances.

Perhaps the Minister could go further and say what directions the Ministry of Defence will give regarding the commercial practices and policies of ABRO under the new trading fund. Will there be any clear guidelines about which customers it can trade with? Will it be permitted to trade within NATO or outside it? Will trading with some regimes be questioned? Will there, for example, be an ethical policy built into the commercial practices? The House should hear about that as well.

I do not wish to take up much more of the Committee's time, but I hope that the Minister can give us some answers to those fundamental questions about the new arrangements.

5.8 pm

Michael Fabricant: I very much welcome these moves to modernise ABRO, which are, as my hon. Friend the Member for North Wiltshire has already said, a continuation of Conservative party policy, which naturally we applaud. I have several specific

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questions. I think that the Minister said that there would be savings of around £50 million during a period of five years. That has to be good news, but what ramifications will it have for the 2,700 ABRO employees? The Minister has already said that a number of those employees have been contacted with a view to the possibility of voluntary redundancies. How many voluntary redundancies does he imagine will be necessary over the five years? Where will the £50 million be saved? Will it be saved solely from the number of people employed by ABRO?

I am also curious to know whether a business plan has been produced. The Minister did not mention one, but there must be a business plan. Who helped to prepare the business plan, and did he receive any outside advice from management consultancy firms or auditors? If auditors were involved, I certainly hope that it was not Andersen Consulting. It would be helpful if the Minister could explain whether the business plan was generated from within the organisation—because in my experience, that can often mean that a plan contains some element of wishful thinking—or whether outside advice was taken.

The Minister tried to answer some of my questions regarding the relationship that ABRO will have with other commercial organisations, and my hon. Friend tried to tease out further information, but I am still unclear about whether ABRO will compete in an open market against other countries in and outside the United Kingdom. For example, will ABRO compete with other service organisations? Not long ago, I went with the hon. Member for Portsmouth, North (Syd Rapson) to ATTURM, which I think stands for the Amphibious Trials and Training Unit of the Royal Marines. ATTURM also carries out maintenance of land-based equipment. Does the Minister envisage that ATTURM will compete with ABRO? Indeed, will ABRO compete against ATTURM and offer services to the Royal Marines?

I have been concerned in the past about the unfair competition between the BBC and commercial organisations in the marketplace because the BBC is funded in a different way through the licence fee. It argues strongly, although others would argue to the contrary, that transparent costing ensures that there is no cross-subsidisation from its programme services, but what assurance can the Minister give to organisations that will compete with ABRO that ABRO will compete fairly on a commercial basis, and that it will not be cross-subsidised by the work that it does in a different, non-commercial function for the armed forces?

The Minister talked about smart acquisition. Will he explain exactly how smart the acquisition procedure is? To what extent will ABRO be obliged to provide quotations for a fixed duration and fixed price, and what will ABRO's liability be if it breaks those conditions? Will it have the same liability as its competitors in the private, commercial market?

Finally, I want to ask about dividends. I did not follow what the Minister said, but that might have been because of my dimness. If the organisation will

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still be wholly owned by the armed forces and if the Government will waive the first three years of dividends, what sort of dividends can be expected? Unlike in the case of a loan, when interest must be paid at a certain rate, any commercial organisation can decide whether it needs to declare a dividend. What will be the criteria on which dividends are declared? Surely that is up to ABRO, not up to the Treasury, and what sort of dividends are the Treasury looking for anyway? Is dividend the right word to use? Surely, in effect, it is a loan and we are considering a coupon value and an interest rate. I am not clear about that. If the Minister can explain it, I shall be deeply obliged.

5.14 pm

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