Defence: Procurement

Lord Rosser Excerpts

Monday 18th March 2013 Grand Committee

[Lord Rosser]

My Lords, I add my thanks to my noble friend Lady Dean of Thornton-le-Fylde for securing this debate on the important issue of defence procurement, on which there are areas of concern and uncertainty, a number of which my noble friend raised. The Government claim to have a balanced budget for defence, but it applies only to the equipment budget, which represents 40% of total Ministry of Defence annual expenditure. The recent National Audit Office report did not even cover that 40% as it did not look at equipment support costs, which make up just over half the total equipment plan cost. The report stated that,

“there is systemic over-optimism inherent in the Department’s assumptions around the costing of risk”,

and that,

“the cost of … procurement projects in the Equipment Procurement Plan has been understated by £12.5 billion”.

The National Audit Office also said:

“Achieving affordability is … contingent on savings being achieved elsewhere in the budget”,

which can only mean the non-equipment budget comprising welfare, housing and manpower.

One of the major outstanding procurement matters, as has already been said, is a decision on the future of Defence Equipment and Support, on which there appears to be some delay. The Government favour moving to a government-owned, contractor-operated organisation, but have not answered many of the points of concern that have been raised, including those raised by the Defence Select Committee in the other place. The opposition position is that private expertise should be integrated in policy-making, since a partnership delivers positive policy outcomes. We have, however, practical reservations about the GOCO model for reform of Defence Equipment and Support. Accountability to Parliament must be retained, and the reasons for outsourcing a £160 billion equipment programme must be much more explicit than is the case at present.

It is not clear with a GOCO what risk is being transferred from the public sector to the private sector. The risk lies with the body or organisation that pays the cost in either financial or reputational terms if equipment is not delivered to specification, to time and within budget. Where that risk currently lies with the Ministry of Defence in the public sector it is not going to be transferred to the contractor-operated but government-owned organisation, not least because no contractor would be prepared to take on such a risk. It is difficult to see what risk at all would be taken on by the contractor. Should the full burden of risk continue to be with the Ministry of Defence, the benefits of the GOCO model and the outsourcing of procurement decision-making become harder to see.

In order to gain or retain an advantage over potential aggressors and enemies, new defence equipment, by definition, will be at the leading edge of technology. That can increase the likelihood of overruns, since new ground is being broken, and, with it, the uncertainties that have to be addressed and the unexpected that may well occur. In that situation the risk has to be borne by the public sector since no company would be prepared to take on such a risk that could well jeopardise their very existence if it materialised.

A private contractor operating a GOCO is presumably going to achieve its return through equipment that is procured rather than through equipment that is not, even though in some cases dropping, or making significant changes to, a project would appear the better option than continuing with it. Under the GOCO proposal with the private contractor, how would the contract incentivise or reward a project manager to meet the time and cost targets of a project if it had become clear either that the costs would be well in excess of what had been estimated or, alternatively, that the specification could no longer be met within the timescale—or, indeed, adequately met at all? We need a broader new culture, with the Government being prepared to return a project to the main gate stage when forecast cost or timescales exceed set targets. Changing specifications and an acceptance of missed targets should not be the norm.

Presumably, under the GOCO, many of the same people as now would continue to be involved in defence procurement, as the TUPE arrangements would apply, with those currently involved being transferred over to the new organisation. If the argument is that a private contractor will somehow be better able to buy in and bring in talented people, then why can the Ministry of Defence not do this? We have a model of private sector management operating an activity in the defence field at Aldermaston. What exactly does the Ministry of Defence feel has been achieved from this that has been beneficial in terms of cost and performance? What experience do other countries have of outsourcing responsibility for defence acquisition? Under the government-owned, contractor-operated scheme, how would the Ministry of Defence retain overall responsibility for UK defence acquisition? Would such a development in this highly sensitive security field have an adverse impact on levels of co-operation with allies?

The greater the extent to which responsibility for UK defence acquisition is outsourced to the private sector then the less knowledge on this vital and security-sensitive area of activity is retained within the military and the Ministry of Defence. There must surely be an argument for nurturing and developing these skills within the Ministry of Defence and providing opportunities for worthwhile and satisfying careers within defence acquisition, rather than seeing defence acquisition as a step on the ladder to another career within the military field. This would help to ensure that the expertise and knowledge are acquired to work with maximum effectiveness with both manufacturers and suppliers, as well as within the Ministry of Defence and the military. We need to be able to offer a permanent professional career choice in procurement, ending two-year stints.

This is surely an area of activity where the Ministry of Defence must retain real knowledge and expertise, bearing in mind the sensitive security nature of defence acquisition, the sums of money involved and the need for a defence industrial strategy which supports appropriate national sovereignty. The House of Commons Defence Select Committee stated in its recent report that,

“the absence of a defence industrial strategy which supports appropriate national sovereignty puts the UK at a disadvantage against competitor countries”.

Procurement power should be used to provide certainty, support supply chains, increase transparency and establish an active industrial strategy in partnership with business. Since the Government seem to regard buying off the shelf as their default position, it is increasingly important to give industry greater certainty—and that means being explicit in the capabilities the Government intend to purchase off the shelf and those they regard as sovereign.

When an effective market exists, competition is the best procurement policy. The reality, though, is that there is seldom a viable market for major defence projects. There must be a case for considering how certain value-for-money tests might be taken into account, including wider employment, industrial or economic factors. Given the social and economic impact of defence procurement, it should be looked at on a cross-departmental basis. Defence decision-making could be made more transparent through the MoD publishing the cost-benefit analysis that provided the basis for awarding contracts, while respecting commercial sensitivities and any classified security issues. This would also add greater accountability, something that was exposed as necessary during the Department for Transport’s west coast main line franchising debacle.

I hope that the Minister will be in a position to provide more information on the Government’s intentions and reasoning on future defence procurement. Defence procurement is technical, and reform to Ministry of Defence internal structures is necessary, but we should surely always remember that the goal and objective for procurement is about delivering equipment when and where it is needed on the front line in order that battles can be won, lives can be saved and operations brought to a successful conclusion.