Defence Committee

Session 2002-03

Press Notice No.36, 23 July 2003




DEFENCE PROCUREMENT
EIGHTH REPORT HC 694

The Eighth Report from the Defence Committee in Session 2002-03, Defence Procurement, is published today as House of Commons Paper 694.

The report examines aspects of  the ‘Defence Industrial Policy’ (published last October by the MoD and DTI) including market access, competition and risk-management, and lessons that the MoD need to draw in those areas from current equipment projects, including the Nimrod aircraft, Astute submarine and Future Carrier programmes.

While insisting that competition remains the bedrock of MoD procurement policy, the Defence Industrial Policy also clarifies government thinking on the circumstances when competition will not be used or should be curtailed. It also recognises that firms should not be over-burdened with risk. The publication of the Policy therefore brings a useful, though long-overdue, increase in transparency to this important area, although its practical interpretation will depend on building-up a ‘case law’ of projects.

Although, the MoD’s focus on open competition helps secure value for money in defence procurements, the Defence Industrial Policy properly recognises its limitations. The Committee warns that as firms rationalise and their number in particular market sector diminishes, the MoD will not be able to rely on open competition if that gives foreign suppliers access to the UK’s open defence market which is not reciprocated by other countries.

The UK must maintain pressure on its European and US partners to conclude already existing international agreements aimed at opening up defence markets. The Committee notes that a waiver for the UK on the US International Traffic in Arms Regulations has been delayed in Congress, and sees this having unfortunate consequences because it is a touchstone for our relations with our closest ally, and the delay risks conveying a message about the nature of the US-UK relationship. The Committee wrote to Congress to express its concerns.

The Committee notes that contracts for two major projects-Astute and Nimrod-have been renegotiated because of difficulties stemming from poorly managed risk. It found that the contractor-BAE Systems-was over-ambitious about the technical risk. The firm had agreed with the MoD fixed-priced contracts which held the firm to prices and delivery deadlines which under-estimated the risks, either in error or by being blinded by the must-win nature of those competitions. The Committee conclude that insisting on the firm delivering as promised would have been a hollow victory if that had left the projects stalled. Furthermore, the Committee accept that, in making extra financial contributions to rescue these programmes, the MoD will have made a sensible use of taxpayers’ money provided that the bail-outs do not exceed the amount by which the firm under-priced risk in the first place.

The Future Carrier programme is following a very different track, with the MoD being part of an ‘alliance’ with the two firms (BAE Systems and Thales-UK) that had been previously in contention for the programme. The Committee recognises that it will involve some very difficult negotiations to iron out the complex relationship between the alliance partners, and between the firms and the MoD (which will be on both the customer and supplier side of the fence), but the Committee considers that it deserves support as a model for trying to avoid some of the pitfalls of the Nimrod and Astute programmes.

The Committee also examines the progress of the Smart Acquisition initiative, now five years old. It  concludes that it has done much to reform the MoD’s procurement processes, and has helped reduce cost and time overruns, but that there remains a question about the agility of those procedures to provide equipment for the Armed Forces when they need it. The way new requirements are managed, such as for the Watchkeeper unmanned aerial vehicle and FRES armoured vehicles, will be tests for the MoD’s ability to increase its procurement agility. But the Committee concludes that on those programmes the conflicting pressures to reduce both their timescales and their risk have served to highlight how difficult it will be to balance such factors. The Committee will watch with interest how the new Chief of Defence Procurement, Sir Peter Spencer, conducts his re-examination of Smart Acquisition in order to find that agility, and to reflect the provisions laid down by the Defence Industrial Policy.