Procurement policy

6. MoD told us that it takes a wide range of factors into account in making procurement decisions. The effects on industry were an important element in this assessment, not least in the light of the effects that decisions may have on future procurement options and therefore on long-term value for money.[7] Competition remained fundamental to obtaining value for money, and where competition was not practical MoD sought to let contracts with agreed prices at the outset under the NAPNOC ('No Acceptable Price, No Contract') arrangements.[8] MoD told us that there was no preferential "buy British" policy, but that in practice in recent years UK companies had won some 90%, by value, of contracts placed by MoD.[9]

7. In considering equipment procurements, MoD's assessment criteria include factors relating to the defence industrial base, under four headings:[10]

• value for money in the longer-term, including the cost implications of the creation of a future monopoly;
• security of supply, especially when non-NATO countries are involved, and taking account of the likelihood of support in times of crisis; and
• preservation of industrial capabilities, including a capability:
  
  to meet operational requirements;
  to support existing and future weapon systems, to provide industry support for military operations, and to regenerate critical equipment;
  to contribute to collaboration;
  to avoid the creation of a monopoly, or over-dependency on a company or country;
  to promote defence exports.
• the benefits to MoD of possible defence exports, including potentially lower unit prices for MoD's order and the survival of some companies for strategic or competition reasons.

8. MoD and DTI retain distinct roles in considering equipment procurements—while MoD is the customer, DTI sponsors UK producers selling to MoD.[11] MoD told us, however, that following our predecessor Committees' last joint inquiry, a more systematic approach to the consideration of industrial factors had been introduced. MoD notify the DTI of any project involving more than £5 million of development or £15 million on production,[12] and new MoD instructions stress the importance of early consultation with the DTI.[13] An expanded and formalised DTI role[14] was attributed to the suggestions made by our predecessor Committees' report[15].

9. Our industry witnesses remained concerned, however, that long-term industrial implications of MoD procurement decisions had not been given sufficient weight in the last few years. As well as examining the implications on the defence industrial base and the capabilities needed of the defence industry, government ought to be looking more closely at the benefits to the economy as part of the overall formal assessment process. A helpful practical measure would be to have the DTI represented in the MoD Equipment Approvals Committee (EAC).[16] Industry witnesses recognised the practical difficulty of doing this in a way that would not threaten value for money for the taxpayer, but were hopeful that MoD's current review of its acquisition processes—part of its 'smart procurement' initiative—would come up with a methodology.[17]

10. We recognise the advantages of the distinct roles of the DTI and MoD concerning equipment procurement, but they must continue to seek ways of considering a fuller range of industrial and economic factors, and as early in the process as possible. DTI representation on the EAC would be useful step. We are heartened, nevertheless, to hear of the improvements made following the recommendations of our earlier inquiry.

11. In our 1995 report we drew attention to industry concerns about the adversarial nature of the relationships between MoD and industry, and the high costs frequently incurred in MoD's competition processes. At that time, a recently published White Paper on government procurement[18] had advocated relationships with suppliers combining competition with cooperation, with the benefits shared in partnering arrangements. During 1996 and 1997, MoD's Procurement Executive and associated procurement staff were collocated at Abbey Wood near Bristol, with the aim of improving the effectiveness and efficiency of procurements. Only now, however, do MoD seem ready for this new 'partnership' approach with industry, which we had supported. An important element of the current Strategic Defence Review is MoD's "smart procurement" initiative, with which industry has been closely involved. Their assessment is that procurement timescales can be halved as a result of the more flexible processes envisaged.[19] The results of the smart procurement initiative have only recently been published,[20] and the Defence Committee are examining them closely as part of its separate inquiry into the Strategic Defence Review. 'Partnerships' with industry are at its heart, with arms' length relationships only when partners are being selected through competition. We very much welcome this new approach.

Collaboration

12. If governments collaborate in specifying and buying defence equipment, its high cost can be made more affordable because the costs of development can be shared and lower unit production costs can be achieved through longer production runs, [21] although savings may be partially offset by the additional costs involved in managing collaboration. As our previous report noted, the UK is now very unlikely to be able to afford to produce new generation naval vessels, tanks or fighter aircraft to the highest modern specifications for its own use alone. Collaborations have a long history, usually initiated for specific individual projects, and the UK is currently involved in 50 collaborative projects mostly with France, Germany, Italy and the US.[22]

13. The critical components of successful collaboration are the opportunities for efficiency from tapping into what each partner country does best, and from establishing a common equipment requirement. In our 1995 report we drew attention to juste retour in government-sponsored collaborations—where the industry of each participating country is allocated a predetermined share of the work, rather than contracts being awarded according to purely commercial considerations. Prime contractors, like British Aerospace, see having the most competitive supply chain at the disposal of any newly restructured entities as absolutely vital for success against some fierce international competition.[23] There was no juste retour in the Airbus programme, which succeeds in a very competitive market for commercial airliners, and UK industry witnesses told us that they would like to see that model carried across to other areas.[24] There is a history of some countries, having had their share of production work, failing to honour their commitments to purchase the equipment in the agreed quantity. We see no justification, in today's more competitive market, for retaining juste retour.

14. As regards common equipment requirements, many past collaborations have proved expensive and difficult to manage because individual countries have required variations in the equipment to suit their own needs more closely. Efforts within Western Europe to harmonise defence equipment requirements are long standing. The Western European Armaments Group (WEAG), and its predecessor Independent European Programme Group, have provided a forum for armaments cooperation between 13 of the WEU countries (including the UK) since 1976, and the EU [25] has had its own initiative to formulate a strategy in this area since 1995.[26] The objectives of the WEAG include securing more efficient use of resources through increased harmonisation of defence equipment requirements, and since 1993 has been examining the scope for setting up a European Armaments Agency. In April 1997 it set up the Western European Armaments Organisation (WEAO) as a precursor to such an agency. In November defence ministers of the 13 WEAG countries meeting in Erfurt called on their national armaments directors (in the case of the UK, the Chief of Defence Procurement) to develop recommendations for the way ahead, including a plan and timetable to guide further steps towards forming a European Armaments Agency. So far, the WEAO has only been tasked with coordinating R&D programmes, but it is now undertaking work to develop common principles, procedures and regulations for the prospective EAA. The WEU's procurement organisations may provide a welcome contribution to harmonising the demand side of the defence market in Europe. The need for this is urgent, but real progress remains slow.

15. Our previous report noted a 1994 Franco-German initiative to set up a bilateral agency, centred initially on a joint programme to develop a new armoured vehicle, and our predecessor Committees considered it essential that the UK be a full participant in any such agency. The UK did subsequently join, along with Italy, and in November 1996 ministers of the four countries established the Organisation for Collaboration and Cooperation in Armaments (OCCAR).[27] The UK requirement for a Multi-Role Armoured Vehicle (MRAV) is seen by many as the UK's entry ticket to OCCAR, and in April this year the Government announced their intention to proceed, with France and Germany, with one of two bidding consortia for the MRAV.[28] Further programmes with a UK involvement will include existing collaborative projects—the COBRA radar system, the TRIGAT anti-tank missile and the TRIMILSATCOM military satellite.[29] In many quarters, OCCAR—like the WEAO—is seen as a precursor to a possible European Armaments Agency. In October last year, the German national armaments director said that WEAO and OCCAR were complementary and were pursuing the same aims.[30]

16. On a different front, NATO also has a role in encouraging equipment procurement collaboration, under the aegis of its Conference of National Armaments Directors which meets regularly. As well as seeking to encourage harmonised equipment requirements across the Alliance, it is concerned with promoting equipment inter-operability. It also acts as a trans-Atlantic bridge in discussions between Europe and the North American allies on equipment matters.[31] NATO is undertaking a wide-ranging Armaments Review, and national armaments directors have agreed to focus their activities on only the key collective military requirements of the Alliance, and to place more emphasis on ensuring equipment inter-operability between Alliance members. As part of the review, they expect to determine the detailed mechanisms and processes this would need by November 1998.[32] Collaborative programmes, based on common equipment requirements for militarily key NATO equipment, will help engender shared commitment to the alliance, as well as more efficient multi-national NATO operations. We recommend, therefore, that the UK Government play its full part in making the NATO procurement review a success, to put NATO procedures on a firmer footing as new members address their re-equipment requirements.

17. When we asked about the proliferation of organisations in Europe with a role in equipment collaboration, SBAC witnesses told us that many had been created to solve a problem that existing ones had not solved,[33] and that with so many organisations there had to be a case for their rationalisation.[34] MoD's Chief of Defence Procurement considered that having 13, and sometimes 16, members of many WEU bodies was very cumbersome for reaching agreement. It had led to the requirement for a new organisation—OCCAR—with just four members, which was much more effective in, for instance, trying to get over the problems of juste retour.[35] We note that discussions on how the work of OCCAR and the WEAO might be merged, to create a European Armaments Agency, have run into problems in accommodating the wishes of some of the WEU's smaller nations who are concerned to retain juste retour on political rather than commercial grounds.[36] OCCAR will, in its transition period at least, seek to achieve a balance of work at a higher level—over several projects and over several years, rather than for individual projects. Its long term aim, however, of eradicating juste retour from collaborative procurements is to be welcomed; if Airbus can succeed without it, there is no overriding need for it in defence equipment programmes. The UK should continue to contribute fully to all procurement organisations—many overlap, but they are not mutually exclusive. OCCAR, however, centred on a manageable nucleus of countries, presents the most promising opportunity to secure decisive action based on commercial imperatives. We recommend that the UK play a full part in continuing to steer it along these lines, including requiring member countries to abandon juste retour as a pre-requisite for jointing OCCAR.

18. As regards collaboration with the US, MoD told us that although the strategic relationship with the US was very important the US had traditionally been reluctant fully to transfer technology abroad. UK companies have been genuinely equal partners in US collaborations in only a relatively limited number of cases. Where opportunities arise, however, collaboration with the US can provide significant economies of scale and access to technologies not available in Europe. MoD's full partnership in the US Joint Strike Fighter programme, the most notable current example, might meet the UK's requirement for a Future Carrier-Borne Aircraft as well as requirements for fighter aircraft in 3 of the American armed services.[37] It is vital that the UK builds on the excellent basis of mutual trust and continues to give close attention to bilateral collaborations with the US, especially where the US offer the technologies essential to our future operational capability. Collaborations should be driven by operational requirements, not by any desire to aid industrial restructuring.

19. The National Audit Office have reported many times in the last few years on problems with collaborative equipment projects, including difficulties stemming from juste retour and setting operational requirements for the equipment. Each year they report on progress of the largest 25 projects in their Major Projects Report —at least 9 of which were collaborative projects in 1997, including Eurofighter, the largest of all. The NAO have also reported separately on the interim lessons of the Common New Generation Frigate ("Horizon") and Eurofighter programmes.[38] Many such collaborative programmes have in recent years suffered greatly from time and cost overruns. MoD's 'smart procurement' initiative is specifically targeted at tackling these problems. The importance of many major collaborative projects stems not just from their industrial significance and the proportion of MoD's procurement budget that they absorb, but also from their political importance for NATO cohesion. We consider that Parliament ought to be more closely involved in assessing the merits of proceeding with major collaborative projects at the initial conceptual and successive key stages in their progress. Initially, this might cover those projects meeting the criteria for inclusion in the Major Projects Report. The Defence and Trade and Industry Select Committees could have a part to play in fulfilling such a role.

Strategic requirements

20. In our 1995 report we noted Belgium's unwillingness to provide us with shells during the Gulf War in 1991, and we described negotiations then underway for an ammunition joint venture between Royal Ordnance and Giat of France which would have involved a significant degree of interdependence. Negotiations on the deal have since stumbled and the cause, we are concerned to hear, centred on security of supply difficulties. The DMA told us that having the interdependence was intended to help guarantee supplies for both sides. But the balance would not have been right, with Royal Ordnance providing infrequently used tank ammunition but Giat producing artillery ammunition that would have been used in training every year in great volumes.[39] Discussions were still underway, though not just with the French.[40]

21. MoD told us that how strategic considerations of industrial capabilities affect particular assessments depends on the prevailing circumstances and costs, and not on preconceived assessments of any industrial capability as "important" or "strategic".[41] Lord Gilbert said that from a military perspective a list of items whose procurement in the UK was absolutely critical would be very short.[42] He told us that making sure that we never again found ourselves in the Gulf War supply situation was very high on his list of priorities, but he pointed out that many types of future conflict would not in any case allow time to replenish stocks until hostilities were over.[43]

22. There are likely to be few cases in the foreseeable future where the UK would wish to operate alone militarily and, with globalised markets, retaining a self-sufficiency in strategic capabilities is becoming an increasingly difficult and expensive option. The key to retaining access to strategically important technologies and manufacturing capabilities, in an era of an increasingly rationalised industry and collaborative programmes, is to ensure mutual inter-dependence. The risks of dependency are high, however, and the Government must take a hard-nosed and critical look at our ability to keep open such access, and where there are doubts we must still be willing to fund the necessary research and other capabilities single-handed. The security of supply aspects of the proposed six-nation agreement for industrial restructuring (paragraph 38 below) is a very welcome step in the right direction.

Research and technology acquisition

23. The same economic imperatives for collaboration apply in research and technology acquisition as they do for equipment procurements—Government defence R&D expenditure has fallen by 30% in real terms since 1986.[44] Its importance as a strategic resource, however, is more profound. Without a sound research base, our ability to develop and produce advanced equipment in future would be in doubt. In our 1995 report we recommended that MoD and DTI commission 'national strategic technology acquisition plans' for defence-related technologies. As part of our current inquiry MoD told us that the Technology Foresight initiative, already underway in 1995, had to some extent superseded the requirement for such acquisition plans[45] and that Technology Foresight's Defence and Aerospace Panel had been continuing its work. The Panel had been considering long-term opportunities for exploiting technologies in eight areas and would produce the last of their reports on these areas later this year.[46] The DTI were also sponsoring technology demonstration programmes under the Foresight Action initiative.

24. MoD has also produced a Technology Strategy and distributed it to the trade associations.[47] The Defence and Aerospace Panel has now commissioned a similar exercise to establish a National Defence Industry Technology Strategy, which might later be combined with MoD's Strategy to provide a complete overview.[48] The president of the SBAC told us that work on these strategies, when brought together with work on technology demonstration under the Foresight Action programme, would provide a clear strategic view for the long term future.[49] And at a practical level, the Defence and Aerospace Panel is setting up a range of National Advisory Committees to bring emerging technologies and defence requirements together[50] and to foster dialogue and contacts amongst the industrial, government and academic communities in formulating the requirements for research programmes.[51]

25. As far as international collaborative R & D is concerned, the DTI told us of the UK's involvement in the Group for Aeronautical Research and Technology in Europe (GATEUR), and of its dialogue with other European governments and research establishments within GATEUR to create a more favourable climate for interdependent collaboration.[52] Despite the high hopes, however, it is clear that such multi-national collaborations remain elusive, with difficulty even in getting governments to disclose their research programmes to one another. At a recent conference,[53] on the other hand, many considered that for the UK, bilateral collaborations linked to research for specific operational requirements have proved more successful and offer the best prospects, not just with European partners but also with the US where successive defence procurement ministers have expressed a desire to cooperate further. In the past, the US has on occasions been willing to share research with us, where it would not if some other European Countries were involved. The UK must continue to give careful attention to bilateral collaborations with the US, which is the engine-room of cutting edge research in so many areas.

26. Our 1995 inquiry also examined the role of the Defence Evaluation and Research Agency (DERA) in protecting the UK defence research base, and the need for greater technology transfer to the benefit of the civil sector. These are important issues, with significant developments in the offing—the consultation period on the Government's Defence Diversification Green Paper has just ended, and Ministers are currently examining the future status and structure of DERA. The Defence Committee separately examined these matters recently and published its report on 1 July. The Committee accepted that there were some good arguments for change in DERA's status, including the need to adjust for the increasing importance of diversification, especially 'spin-in' from the civil sector. It concluded, however, that the privatisation of some of the most sensitive areas of DERA's work, such as Porton Down, would be abhorrent. It welcomed the Government's rejection of total privatisation but regarded the risks to DERA's impartiality and critical mass of even partial privatisation, in the shape of Public Private Partnerships, as unacceptable and against the public interest.[54]

8  ibid, para 7 Back

9  ibid, para 6 Back

10  ibid, paras 15-20 Back

11  Q 166 Back

12  Q 165 Back

13  Ev p 39, para 15 Back

14  Ev p 47, paras 6, 7 Back

15  Q 164 Back

16  Ev p 104, para 3 Back

17  Q 101; Ev p 54. A number of firms, in written submissions, also called for a stronger DTI input; eg Vickers Defence Systems (Ev p 104), Verity Perkins (Ev p 54) Back

18  Setting New Standards: A Strategy For Government Procurement, Cm 2840, May 1995 Back

19  Ev p 54 Back

20  Within the 'Strategic Defence Review' White Paper, Modern Forces for a Modern World, Cm 3999, July 1998 Back

21  Ev p 39, para 22 Back

22  HC Deb, 19 February 1998 c831w Back

23  Q 13 Back

24  Q 15 Back

25  EU Commission Communication "Implementing an EU strategy on Defence-Related Industries" COM(97) 583 Back

26  The Defence Committee noted developments in the WEAG and EU on procurement matters in its Fourth Report of 1995-96 (HC 105) Back

27  Ev p 39, para 25. OCCAR's title in full is the Organisme Conjoint de Cooperation en Matière d'Armement Back

28  HC Deb, 22 April 1998, c649w Back

29  Ev p 39 Back

30  At the WEU symposium on European Cooperation on the Procurement of Defence Equipment, Munich, October 1997 Back

31  NATO Handbook Back

32  NATO Press Release (97)137, 7 November 1997 Back

33  Q 114 Back

34  Q 111 Back

35  Q 193 Back

36  Defense News singled out Greece and Spain Back

37  Ev p 39, para 26 Back

38  NAO reports HC 692 (1994-95) and HC 724 (1994-95) Back

39  Q 107 Back

40  QQ 170-172. Royal Ordnance has also at various times been in discussions with SNPE of France and Rheinmetall of Germany Back

41  Ev p 39, para 19 Back

42  Q 168 Back

43  QQ 174, 176 Back

44  Sixth Report, Session 1997-98, Defence Evaluation and Research Agency, HC 621, Ev p 4 Back

45  Ev p 39, Annex Back

46  Ev p 39, para 46 Back

47  ibid Back

48  Ev p 47, para 13 Back

49  Q 103 Back

50  RUSI conference on the Future of Defence and Aerospace Research (May 1998) Back

51  Ev p 39, para 46 Back

52  Ev p 47, para 13 Back

53  The Future of Defence and Aerospace Research, RUSI, May 1998 Back

54  Sixth Report, Session 1997-98, The Defence Evaluation and Research Agency, HC 621 Back