Transparency data

Board minutes: 23 January 2018

Published 11 February 2019

Single Source Regulations Office

Minutes of the 19th Board Meeting Board Room, Finlaison House, 15-17 Furnival Street, London EC4A 1AB

Tuesday 23 January 2018 2:00pm to 4:30pm

Board members present:	Others present:
George Jenkins (Chairman)	David Galpin
Mary Davies	Graham Payne
Peter Freeman	Malcolm Botting
Terence Jagger	Catherine Morganti, GIAA
David Johnston	Ben Johnson (item 4)
Marta Phillips	Anton Hume, BDO (item 4)
Neil Swift	Andrew Stewart, BDO (item 4)
Matthew Rees	Duncan Nott, BDO (item 4)
	Simon McCullough (items 5 and 6)
	Colin Sharples (item 6)
	Justine Wharton (item 6)

1. 1. Welcome, apologies, announcements and declarations of interest

1.1. The Chairman welcomed members to the 19th meeting of the Board. He noted that Catherine Morganti from the Government Internal Audit Agency would be observing the meeting to support the Chairman’s review of the Board’s effectiveness.

There were no declarations of interest.

2. 2. Minutes of 18th meeting of the Board and action tracker

2.1. The Chairman introduced the minutes of the Board meeting held on 11 December 2017. Twelve actions were recorded on the separate action tracker. All had been completed or were reported on in papers elsewhere on the agenda.

No other matters were arising.

2.2. The minutes of the 18th meeting of the Board were approved as a correct record.

3. 3. Interim Chief Executive’s Report to Board

3.1. Neil Swift, Interim Chief Executive, presented his report to the Board, which provided an update on items not included elsewhere on the agenda.

3.2. On 10 January, the Interim Chief Executive had appeared before the Public Accounts Committee to provide evidence on non-competitive procurement of defence equipment. The Committee’s questions had focused on issues including the powers and role of the SSRO following its review of the legislation, the baseline profit rate methodology and the relationship between the SSRO, MOD and industry.

3.3. The Defence Select Committee had published its report into defence procurement on 14 December 2017. The report referred to evidence provided by the SSRO in 2016 and included a chapter on the SSRO.

3.4. The SSRO’s recommendations following its review of legislation would be published on 24 January, alongside its report on cost risk and incentives in qualifying defence contracts. The Chairman would write personally to respondents to the consultation to highlight the publication.

3.5. At its meeting on 11 December 2017, the Board had authorised the Chairman to agree the structure of the Executive Committee after consultation with the Interim Chief Executive. They had subsequently agreed that the Executive Committee would comprise a Chief Executive and three Directors. Work was underway to recruit the new permanent Chief Executive and a Director of Legal and Policy in line with the agreed structure.

3.6. The SSRO was preparing a report on wage inflation with the MOD and the draft would be shared with the Board .

3.7. The SSRO’s Corporate Plan 2017-20 stated that an annual stakeholder survey would help measure performance against several of the SSRO’s key performance indicators, to help the SSRO understand how it was perceived by stakeholders. The survey was due to be sent via email to selected contacts at the end of January. A second follow up stage of qualitative, discursive interviews would be completed in March and April.

3.8. At its meeting on 11 December 2017, the Board considered and agreed the recommendations of the review of governance and scrutiny, which established new arrangements for the SSRO’s Board sub-committees. The Chairman had subsequently reviewed the membership of the Board’s sub-committees and announced the membership as follows:

• Regulatory Committee: Peter Freeman (Chair), Terence Jagger, Marta Phillips.
• Audit Committee: Marta Phillips (Chair), Mary Davies, David Johnston.
• Referrals Committee: Terence Jagger (lead member), with committee members to be appointed on a case-by-case basis.

3.9. The Board discussed wider stakeholder engagement, the outcomes from recent meetings and opportunities for non-executive members to attend site visits and meetings in future.

The Board:

• noted the information provided in the report regarding stakeholder engagement, publications and events, the review of legislation, the stakeholder survey and review of board effectiveness;
• noted the Executive Committee structure set out in section 5; agreed that the wage inflation draft report would be shared with Board members outside the Board meeting cycle, and that the Chairman would consider the views of Board members before approving the document for publication; and
• noted Board sub-committee appointments.

4. 4. Baseline profit rate

4.1. Matthew Rees, Executive Director of Regulation and Economics, introduced a report on the SSRO’s function under Section 19 of the Defence Reform Act 2014 to provide the Secretary of State with its annual assessment of the appropriate baseline profit rate (BPR), SSRO funding adjustment (FA) and capital servicing rates (CSRs). Having considered a preliminary rates recommendation at its meeting in December 2017, the Board was now asked to consider and approve the final recommendation on the BPR, FA and CSRs for 2018/19. The recommendation would be submitted to the Secretary of State in advance of the statutory deadline of 31 January 2018.

4.2. The Board had agreed at its 26 June 2017 meeting that the published methodology should be used for the current exercise, with some small procedural improvements relating to how the methodology was executed. The MOD had indicated that it agreed the methodology should be used for the 2018/19 recommendation.

4.3. Representatives from BDO presented an independent assessment on the application of the SSRO’s methodology and an assessment of the procedures in relation to the calculation of rates. BDO provided feedback that the assurance activities indicated that in their professional independent judgement the approach taken by the SSRO was reasonable, appropriate and supportable. All comments raised by BDO had been addressed. The Board considered the overall population of companies in each of the comparator groups and agreed that it was sufficient to provide a robust BPR recommendation. BDO confirmed that it had no concerns about the quantum of companies in the set.

4.4. The Board discussed the recommendations set out in the paper. Board members were grateful for the workshop on the methodology and calculation of the rate that had been provided by the Executive Director of Regulation and Economics prior to the meeting. It was agreed that the SSRO would consider a review of the overarching six step process with any recommendations feeding into the next legislative review. Developments in this area would be signalled in the Corporate Plan 2018-21.

4.5. The Board considered the strategy for presenting the BPR publicly at the time of the announcement in March 2018. For the 2017/18 recommendation, the SSRO had reissued its methodology for determining the BPR, FA and CSRs, and introduced new ‘fact sheets’ that sought to address feedback on the transparency of the processes underpinning the BPR recommendation. The Board agreed that this suite of documents, updated to reflect the 2018/19 rates, should be published to provide appropriate transparency. The interim Director of Legal and Policy was asked to provide advice on the publication of documents within the set. Action: David Galpin.

The Board:

• noted the evidence that the SSRO’s methodology remains an appropriate basis upon which to form the Recommendation to the Secretary of State (section 4 and Appendix 1);
• noted the factors which are deemed relevant to the Board’s consideration of the final Recommendation (section 5);
• considered the external assessment of the SSRO’s application of its methodology (provided by BDO at the meeting);
• approved the final Recommendation on the BPR, FA and CSRs for 2018/19 (section 6);
• agreed the documentation and supporting analysis which the SSRO will present to the Secretary of State to accompany its final recommendation in January and make available in March when the Secretary of State announces the rates for 2018/19 (Appendix 3);
• agreed that the SSRO’s current Guidance on the baseline profit rate and its adjustment 2017/18” should be reissued in March to include the 2018/19 rates, at the time of the Secretary of State’s announcement (section 7); and
• agreed that the Chairman would, having considered the views expressed by the Board at the meeting, approve the final documents for provision to the Secretary of State by 31 January 2018 and for publication in March 2017 at the time of the Secretary of State’s announcement.

5. 5. Allowable Costs

5.1. Matthew Rees, Executive Director of Regulation and Economics, introduced a report on the SSRO’s Allowable Costs guidance and asked the Board to consider and approve the recommended changes to the guidance. The SSRO was required by the Defence Reform Act 2014 to issue guidance for determining whether costs were Allowable Costs under qualifying defence contracts. A cost is Allowable if it is appropriate, attributable to the single source contract and reasonable in the circumstances. The SSRO’s guidance had originally been published in 2015 and was last updated on 1 July 2016.

5.2. The SSRO had adopted a two-stage approach to revising its guidance. Stage 1 involved issuing three working papers on 19 June 2017 to discuss guidance topics in detail and seek stakeholder views. Stage 2 involved a public consultation for eight weeks on draft proposals between 2 October and 24 November. The Board had approved the consultation document at its meeting in September 2017.

5.3. There had been 12 responses to the consultation, from the MOD, industry, the ADS Group, Metasums Ltd and the ICAEW. The responses had been substantive in content and of a high quality. The SSRO had constructive engagement with the MOD, industry and other stakeholders throughout the revision process, including several meetings. Three workshops had been held, which were well attended and provided insight into the MOD’s and defence contractors’ views and verbal support for the changes the SSRO was proposing.

5.4. The Board considered and agreed the proposed changes to the guidance, which were described in the report. The final guidance document would be published on 1 February 2018 ahead of its application from 1 April 2018. A consultation response document would also be published on 1 February 2018. Action: Matthew Rees.

5.5. The SSRO was planning to hold a workshop in April with the MOD and industry to discuss an integrated programme of development for the next review of the Allowable Costs guidance. It was recording comments received from respondents on topics where the SSRO had not yet proposed changes. The Board considered potential topics and issues relating to sunk costs, which had been the subject of a referral for an opinion in 2017.

The Board:

• approved the recommended changes to statutory guidance;
• approved the consultation response document; and
• agreed that the Chairman would approve the final documents for publication, having considered the views expressed by the Board at the meeting.

6. 6. Corporate Plan

6.1. Neil Swift, Interim Chief Executive, introduced a report that updated the Board on the development of the SSRO’s Corporate Plan 2018-21. Following the Board discussion on 11 December and further engagement with staff, the Corporate Plan had been further developed and a draft was put to the Board for consideration.

6.2. Following the Senior Stakeholder Forum on 21 November 2017, the Chairman had written to industry attendees seeking views on the proposed nine corporate objectives in the Plan. The responses were broadly supportive of the objectives. A common theme for improvement related to the reports that contractors with qualifying defence contracts were required to submit. Respondents wanted to ensure that they added value, improved transparency, remained relevant and did not create an unnecessary burden.

6.3. The focus of activity since the December Board meeting had been on developing the content of the Corporate Plan to reflect the extent of the SSRO’s ambitions in the work it would undertake and how it would undertake that work over the next three years. The draft Corporate Plan was more clearly linked to the SSRO’s functions than the previous year’s. It also provided an indication of ‘what good looks like’ for each objective.

6.4. A more detailed internal business plan was being produced, which the SSRO would use to drive the Corporate Plan forward over the next year. This would also set out in detail the resourcing that would be required to deliver the Corporate Plan.

6.5. Key performance indicators had been developed for each objective. A mixture of quantitative and qualitative indicators were included, and the Board discussed the relative merit of each, including the percentage levels for the achievement of individual KPIs and the presentation of the information. The Corporate Performance Report would be adapted to show the new objectives.

6.6. In discussion, the Board considered prioritisation of the workstreams set out in the draft Plan and what the main priorities would be. It was noted that there would be further prioritisation at the business plan level and that engagement would help to set out what the priorities should be. A known risk was that referral numbers were difficult to predict, and resourcing for several concurrent referrals was likely to draw on resources from all teams.

6.7. The Corporate Plan would now be sent to the MOD, ADS and all defence contractor members of the Operational Working Group for their feedback for a period of four weeks. This reflected a best practice approach to corporate planning and would enable the SSRO to publish the final plan by the beginning of the 2018/19 financial year. Action: David Galpin.

6.8. The MOD had provided initial feedback, and this would be presented to the Board alongside all feedback provided in the consultation when the Board considered the Plan at its March 2018 meeting.

The Board:

• commented on the draft Corporate Plan;
• approved sending the draft Corporate Plan to the MOD, ADS and all defence contractor members of the Operational Working Group for feedback;
• agreed that four weeks should be allowed for feedback; and
• agreed that the Chairman would approve the final documents for consultation, having considered the views expressed by the Board at the meeting.

7. 7. Corporate Performance Report

7.1. Graham Payne, interim Director of Corporate Resources, introduced the report, which provided an update to the Board on how the organisation was delivering against its corporate priorities as set out in the Corporate Plan.

7.2. The Board considered progress against each of the objectives, and the KPI ratings set out in the report. It was also informed of the resourcing solutions for the workstreams that were flagged in the report for the Board’s attention. The Board considered the SSRO’s financial position.

The Board:

• reviewed and commented on the Corporate Performance Report.

8. 8. Future Board agendas

8.1. The Chairman presented to the Board a two-page document showing the business of all Board and sub-committee meetings until December 2018.

The Board:

• Commented on the draft agendas.

9. 9. Any Other Business

9.1. Graham Payne informed the Board of progress on the recruitment of a permanent Chief Executive. It was likely that panel interviews would take place after Easter.

10. 10. Date of the next meeting

10.1. The next meeting of the Board would take place on 28 March 2018 at 2:00pm.

**These minutes have been redacted for publication.