House of Commons - Defence

Select Committee on Defence First Report

FIRST REPORT

The Defence Committee has agreed to the following Report:—

THE OCCAR CONVENTION

1. OCCAR, the Organisation for Joint Armament Co-operation,[13] was launched as a defence procurement collaboration between the United Kingdom, France, Germany and Italy in November 1996. A Convention formally establishing OCCAR as a body with a separate legal identity was signed by the four countries in September 1998 and laid before the House in June this year.[14] OCCAR requires separate legal status to enable it to enter into contracts in its own right[15] and to facilitate the exchange of commercially confidential information between member states.[16] Until ratification takes place, OCCAR cannot operate properly. The ratification process, we were told, will be completed once a Protocol to the treaty drafted by the Foreign Office is approved by Parliament.[17]

2. When we reported in March 1998 on the proposed Protocols to the Washington Treaty on enlarging NATO membership[18] we stated our belief that this committee has a responsibility to examine on the House's behalf treaties falling within our remit before they are ratified.[19] Treaties, all made under the royal prerogative, are subject to very limited parliamentary control, exercised under the terms of the so-called Ponsonby Rule which Erskine May summarises as follows—

We judged that the potential impact of the operation of OCCAR on Ministry of Defence procurement is considerable and therefore that it was appropriate to ensure parliamentary scrutiny of this Convention before the UK was committed to OCCAR membership. On 14 July, we tabled an Early Day Motion[21] with the aim, under the terms of the Ponsonby Rule, of delaying ratification of the Convention until we had had an opportunity to report on its implications.

3. We sought written evidence from the Ministry of Defence (MoD), and invited a number of representatives of the UK defence industry to comment on the Treaty and its implications. We are grateful to those who responded. On 10 November we took evidence from Sir Robert Walmsley KCB, Chief of Defence Procurement (CDP) and Chief Executive of the Defence Procurement Agency. Sir Robert is the UK's representative on OCCAR's managing body, the Board of Supervisors, and has chaired the Board since January 1999.[22]

Cost-effective defence procurement

4. The management of collaborative equipment programmes[23] has often been the subject of Defence Committee inquiries. In our report last year on the Strategic Defence Review, we highlighted the unhappy history of many MoD procurement projects, several of which have been collaborations with European partners or the US.[24] Most recently we examined the Common New Generation Frigate programme, and the consequences of the UK's decision to pull out of its Horizon warship component because of irreconcilable differences with our French and Italian partners, not only about the equipment required but also the way the procurement process was managed. Our conclusion was that 'the story of European collaborative ventures is not a particularly inspiring one'.[25]

5. In joining OCCAR, the MoD hopes to—

In considering the prospects for this more cost-effective procurement, we examine below the consequences of OCCAR membership in three important areas—the renunciation of juste retour, the opportunities for increased efficiency in procurement and the impact on the costs of managing projects. We also consider issues concerned with the membership of OCCAR, the organisation's accountability and the wider implications the success or failure of OCCAR may have for international defence cooperation.

JUSTE RETOUR

6. The cost to the MoD of buying new equipment is running at around £5 billion a year, almost a quarter of the defence budget. Collaborative projects have become more important as the cost of developing many major new items of equipment has become prohibitive for one country to undertake alone.[27] In our July 1998 joint Report on aspects of defence procurement and industrial policy, we and the Trade and Industry Committee commented that '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.'[28] Many collaborative projects, however, have tended to become bogged down in cumbersome approval processes and lengthy and often fruitless attempts to define common requirements. A perhaps more fundamental hurdle has often been a lack of common political purpose between the participating states, which are often more concerned with securing the best deal for their national defence industries than in applying competitive procurement procedures. This has been epitomised in the principle of juste retour—the basis for almost all previous European collaborations—which automatically assures the industry of each country involved in a project a share of the work in direct relation to that country's financial contribution. As a result, the allocation of contracts can have little basis in the competitiveness of different potential suppliers' bids. We highlighted this in our recent CNGF report,[29] and CDP used another example—Eurofighter—in his evidence to us—

7. In contrast, the OCCAR Convention states that—

juste retour

This means that, although there will be, over time, a balancing of each country's workshare against its share of the equipment procured, this will not have to be reconciled within a single project. The MoD believed this—

The Chief of Defence Procurement was convinced that juste retour had been "unjust" to the taxpayer and the armed forces of the countries involved in collaborative projects, and he believed OCCAR's commitment to competition in the placing of contracts represented "a revolution in European defence procurement".[33] The MoD told us, however, that 'it remains to be seen how this will work in practice',[34] and Sir Robert admitted that the details of the new arrangements for multi-year, multi-programme balancing of contracts were still being worked out.[35] The Defence Industries Council remained to be convinced about the proposed alternative system of balanced workshare, saying—

8. We cannot condone any restriction on the UK's ability to select the best and least expensive sources for the equipment needed for our forces. We are convinced that full and open competition would not only serve the interests of the MoD but would also allow UK industry to satisfy the equipment requirements of many other countries. To secure an agreed Convention with other OCCAR members, some degree of workshare was necessary, though on a looser basis than before. Nevertheless the move away from juste retour in the OCCAR Convention is a very positive step. It sets OCCAR apart from previous collaborative arrangements in putting the emphasis on competition. If OCCAR is to prove itself a worthwhile addition to the list of international organisations, it is essential that its activities are firmly based on this new approach from the outset and that renunciation of juste retour remains OCCAR's underlying principle. The placing of OCCAR on a treaty basis should help to ensure this. Nonetheless, as the UK becomes involved in more OCCAR projects, the MoD must be able to demonstrate convincingly that contracts are being allocated on the basis of real commercial competition. Accordingly, we expect the MoD to report to Parliament any case where OCCAR-managed contracts, in order to secure a balanced workshare, are not placed according to value for money criteria or are awarded without competition.

MORE EFFICIENT PROCUREMENT

9. The OCCAR Convention states that—

... the best ratio between cost ... and efficiency for current and future co-operative programmes is an absolute necessity[

and that—

OCCAR shall aim to adopt best practices for procurement and shall work with Member States to benchmark procurement practices against the highest standards.[38]

10. The MoD's vision of best procurement practice is embodied in the ambitions of its smart procurement initiative. In our report on the Strategic Defence Review, we summed up the main elements of the initiative as follows—

·Adopting new approaches to procurement, including a through-life systems approach.

·Introducing integrated project teams to manage each project, with a greater focus on partnership with industry.

·Simplifying procedures, and tailoring them to the different levels of complexity that projects can involve.[39]

And we went on to say that—

The securing of such benefits is, of course, going to be no less important for OCCAR-managed projects. CDP was confident that many of the principles of smart procurement could be incorporated into OCCAR's working practices, particularly the idea of integrated project teams (although they would be called something else to avoid the impression of telling the other countries how to do it).[41] Defence Procurement Agency staff are, we were assured, firmly committed to smart procurement, and are already working in OCCAR Central Office. They will continue to be seconded to OCCAR project management as required.[42] The smart procurement approach involves having a clear responsibility for the success of a project vested in a single project manager. The Counter Battery Radar (COBRA) programme had had, we were told, three national directors (one from each country), and CDP expressed his satisfaction that within OCCAR it was now able to have a single executive director.[43] Also, under OCCAR management, the number of COBRA project staff was likely to reduce (from 19 to 16), and there will also be a reduction in the UK project office from 8 to 4 staff.[44] CDP told us that, when existing programmes were transferred to OCCAR management, the MoD would expect to see savings on administrative costs of 15 per cent.[45]

11. CDP also had high hopes for how well the PAAMS programme would fare when placed under OCCAR management.[46] We discussed this project at length in a recent report.[47] It appears to us that in this case the main driving force behind the decision to place this project within OCCAR is not so much the pursuit of more competitive tendering or more efficient project management. Rather, it is to smooth its coordination with the Franco-Italian FSAF[48] missile project which those two countries have already put under OCCAR management. Sir Robert told us that if FSAF were within OCCAR, and PAAMS outside, this would fail to secure working arrangements that would facilitate the required exchange of the technical information needed by each country to assess whether the equipment will perform in the way it is required to.[49] Once PAAMS becomes an OCCAR project, proper collaboration should be possible between the project teams without needing to refer everything up to their respective defence ministries.[50]

12. The MoD's positive view of the potential for more efficient working practices within OCCAR, as compared to outside it, was somewhat counter-balanced by Racal Electronics plc, who had had direct involvement in the COBRA project as a shareholder in the joint venture company which was the prime contractor. They told us that—

... During the period since the transfer of COBRA to OCCAR, the most noticeable change has been the growth in size of national contingents being sent to the regular project meetings

and that—

13. We welcome CDP's confidence that participation in OCCAR will bring efficiency savings and increased value for money to MoD procurement projects. His optimism can only be tested once more projects are in progress. We intend to focus particular attention on this aspect of OCCAR's performance in our monitoring of its activities.

COSTS

14. Diffuse accountability is notoriously prone to allow international organisations to become slack in cost control and to degenerate into self-serving extravagance. We were concerned to establish whether placing a programme under OCCAR would bring additional overhead costs to support the OCCAR bureaucracy. The cost of OCCAR membership to the UK is £300,000 for the current year, which represents one-sixth of its total operating costs of £1.8 million. The division of costs between the present member states is one-third each to France and Germany (who have many more projects under OCCAR management) with the remaining third split between Italy and the UK. The Netherlands has applied for membership of OCCAR and this application has been accepted by the Board of Supervisors.[52] When the accession process is finalised, the cost-sharing between the five countries will be recalculated with the four founder members contributing equal shares, and the Netherlands half as much. The UK's contribution will then rise from 16 per cent to 22 per cent of the running costs, but it is anticipated that the number of projects in which the UK is involved will also increase.[53] However, CDP claimed that the savings made on the COBRA project (see paragraph 10 above) since it was put under OCCAR management "has nearly paid for the United Kingdom contribution out of one project".[54]

15. OCCAR needs to be well-funded in order to undertake its work effectively, but it is also important to keep OCCAR staffing levels and running costs within reasonable bounds. We expect the Department to notify the Committee if OCCAR's central office staffing levels exceed its target complement of 46.[55] We discuss below the need for strict financial accountability and direct political accountability to ensure it remains lean, efficient, effective and well-managed.

Membership of OCCAR

16. Previous international collaboration arrangements have often proved unwieldy because of the problem of reaching agreement between a large number of participants. It is hoped that OCCAR with a small, and therefore manageable, number of member countries, will avoid such pitfalls. CDP told us—

... we have made progress in OCCAR on things in, literally, hours, whereas I have been conscious that in other forums ... we cannot even begin to get off the ground, with 17 countries sat round the table.[

The addition of the Netherlands to the existing four signatories has already been agreed and the accession process is well advanced. Belgium has also applied for membership.[57] Some industry witnesses feared that further increases to OCCAR membership would lead to problems. For example, Vickers plc believed—

while the Defence Industries Council argued that other members should not be admitted until—

OCCAR is often described as a 'programme-led' initiative. CDP told us that "the ability of a nation to join OCCAR is at the agreement of the members of OCCAR" and that "there are not going to be spectators in OCCAR with no interest in whether OCCAR actually delivers programmes".[60] Any country wishing to join would have to bring a project, and therefore money, with them and would have to agree to adhere the abolition of juste retour and acceptance of competition as the basis for contracts. Equally, however, the Convention does not bind any country which is a member of OCCAR to put programmes within its auspices.

17. We noted in our Report on aspects of defence procurement and industrial policy, that—

juste retour

We share the concerns of our defence industry witnesses that if OCCAR membership expands any further at this early stage, the advantages it has over previous collaborative organisations will be lost. However, the preamble to the Convention is ambiguous on OCCAR's relations to a future European Armaments Agency. It states the contracting parties conviction that—

In ratifying the Convention, Parliament should be aware of this potentially open-ended commitment to expanding OCCAR's membership. It should not be allowed to imply that the founding principles of OCCAR's operation should be diluted for purposes of political expediency. We recommend that admission of any further new members to OCCAR should not be contemplated until its effective operation has been established over a number of years.

Accountability

18. The Convention grants authority to OCCAR's Board of Supervisors to determine its own rules and procedures. We were concerned to establish that this necessary autonomy would not be allowed to conflict with the need to ensure that OCCAR would be both politically accountable, to this and other Parliaments, and also technically accountable, through financial audit. There is a danger that if such accountabilities are lacking, OCCAR may simply become another extravagant, self-serving and purposeless international bureaucracy in the way that many similar bodies have in the past.

19. The Convention stipulates that the Director of OCCAR's Executive Administration is responsible to the managing body, the Board of Supervisors, for the operation of the Executive Administration.[63] But it was not clear to us who was responsible for the delivery of OCCAR-managed projects on time and within budget. The Defence Manufacturers Association believe that—

CDP was confident that OCCAR staff would ensure the necessary safeguards were in place[65] and that the requirement in procurement contracts to show by practical demonstration that a piece of equipment was effective was a major advance. He also assured us that, in line with MoD practice, OCCAR-managed projects would have terms built into contracts regulating the amount of money paid to contractors at each stage of a project, to ensure there was always an incentive to deliver the equipment on time and within budget.[66] He also confirmed that the National Audit Office would have access to information relating to all OCCAR projects in which the UK was involved.[67]

20. We welcome the assurance that the NAO will have the access necessary to fulfil its responsibilities in relation to OCCAR-managed contracts. However, we remain to be convinced that accountability within OCCAR, and between OCCAR and the governments of its member states, is sufficiently well-defined. We would like to see clearer objectives stated, and measurable outcomes established, against which OCCAR's achievements can be assessed. We have set as one of our objectives the monitoring of major procurement projects[68] and we intend to extend this to OCCAR-managed projects where appropriate. We recommend that the MoD reports annually as part of the Major Projects Report, to the same level of detail as in that document, on the budget and establishment of OCCAR, the progress of OCCAR projects in which the UK is involved and, in particular, on whether projects are proceeding on time and within budget.

OCCAR and European defence co-operation

21. We have also sought in this brief inquiry to clarify what role, if any, OCCAR might play in moves towards closer defence co-operation within Europe. We highlighted the importance of recent developments in this area in March this year in our Report on the future of NATO—

... The government has made a number of statements on how it sees the role of the UK in addressing the Common Foreign and Security Policy of the European Union, and the attendant issue of the future role of the Western European Union, and it is clear that the role of the EU in defence and security issues is evolving at least as quickly as NATO itself.[

We also expressed the hope that the Washington Summit would—

Progress on co-operation in defence procurement between the countries of Western Europe has been a matter for much discussion over a number of years and has been taken forward through various forums under the umbrella of the Western European Union (WEU). In recent years this has been principally through the Western European Armaments Group (WEAG), whose objectives include the more efficient use of resources through better harmonisation of defence equipment requirements. A further step was taken in April 1997 when the Western European Armaments Organisation (WEAO) was set up as a precursor to a possible European Armaments Agency, but to date it has concentrated mainly on R&D programmes.[71]

22. CDP conceded that OCCAR might be perceived by the smaller countries of Western Europe as threatening to create two tiers of nations, divided between the large countries with strong defence industries within the Organisation on the one hand, and the remainder, on the other, left to operate through WEAG.[72] To allay these fears, he told us that the initial approach of the OCCAR countries had been to seek legal status for the organisation through the WEU—

However, despite a long negotiating process, the WEAG countries could not agree to OCCAR becoming part of its legal framework and the four countries which currently make up OCCAR took the alternative route of a separate Convention. CDP believed that now that OCCAR was operating successfully—

23. The effects of the creation of OCCAR also need to be monitored in the context of the much wider issues which remain to be resolved concerning the development both of the Common Foreign and Security Policy (CFSP) within the European Union and of the European Security and Defence Identity (ESDI) within NATO and the implications of these developments for defence organisations, particularly the WEU and WEAG. The MoD said in their memorandum that 'there is no proposal to absorb the WEU into the EU'.[75] This statement typifies the confused and ambiguous messages about the future of the WEU and the EU that are currently being propounded by the UK, French and German governments, and by the WEU itself.

24. The MoD also noted that 'at the Cologne European Council meeting in June 1999 Ministers agreed to include in the EU those functions of the WEU necessary for the EU to exercise its new responsibilities. Decisions should be taken by the end of 2000, when the WEU as an organisation should have completed its purpose.[76] At their meeting of 22 November, however, WEAG Defence Ministers confirmed their commitment to the organisation and to develop further its activities, and they endorsed work intended to establish a European Armaments Agency.[77] The MoD told us that preparatory steps to establish the Agency are also being taken forward by a "group of national experts from WEAG nations" which would report to ministers in the autumn of 2001. The way OCCAR might work with a prospective EAA would, we were told, be considered then.[78] It is still unclear to us, however, what a European Armaments Agency would do that will not be done by OCCAR itself, other than to help those countries who are not part of OCCAR to participate in OCCAR programmes.

25. Witnesses from the defence industry had varying views about the potential for further defence procurement collaboration through the EAA. Hunting plc drew a parallel with the European Space Agency—

Perkins Engines Company Ltd believed—

The Defence Industries Council recognised 'OCCAR's potential value ... as a mechanism to implement a more unified European armaments policy' but said that—

26. At this early stage in OCCAR's operation it is impossible to predict what impact, if any, it will have on defence procurement co-operation in the long term. OCCAR's creation is nevertheless a laudable pragmatic step by the countries concerned to improve European defence procurement co-operation. If a European Armaments Agency is to become a reality, we believe it is more likely to succeed if it adheres to the same principles that guide OCCAR's operation—in particular the commitment to competition— and that this represents the only way forward for Europe to get more bang for its bucks in defence procurement.

OCCAR and NATO

27. In our Report last March on the future of NATO we stressed that—

Under no circumstances must the development of the ESDI, now or in the foreseeable future, be seen to be an attack on the transatlantic nature of the Alliance.[

We have heard nothing since to undermine that conclusion, which remains our firm view. In this context, we asked CDP how he thought the United States would view the development of OCCAR. He told us—

Transparency in the way OCCAR operated, he believed, was key to allaying such suspicion. Collaborative projects with the United States would continue and CDP gave the example of the current Tracer programme for a new armoured reconnaissance vehicle for the Army, which he believed demonstrated that—

The United States was, he believed, in favour of a strong Europe with a strong defence industry and recognises that "they cannot expect European nations to buy all their equipment from the United States".[85] But he also cautioned that 'the UK will not stand in the way of introducing countries from outside [OCCAR] if that is what is necessary to get a better deal, better equipment, more likely to fulfil the contract on time'.[86]

28. It is clear that the future for defence co-operation, within Europe and within NATO, lies in successful collaboration between nations and the development of interoperable equipment. Yet the aims and aspirations of CFSP and ESDI are still vague and their inter-relation with the Alliance is ill-defined. It remains to be seen how OCCAR will contribute to these relationships. The first priority is for OCCAR to prove that it can operate effectively. Once that has been demonstrated, attention can focus on its wider implications for defence co-operation. There remains, however, a disappointing lack of agreement amongst the governments of its member states about OCCAR's place in European defence in the longer term, and about OCCAR's relationship with the North Atlantic Alliance. Unless that vision begins to emerge soon, there is a risk that OCCAR, like so many of its predecessors have done, will begin to lose its way.

Conclusion

29. OCCAR, with its grounding in the principles of competition and the amelioration of the worst effects of juste retour, is an idea whose time has come. Effective European collaboration in procurement will be an essential component of future European defence cooperation if the government's project of a strengthened European defence capability is to be realised. However, it is clear from our evidence that the UK defence manufacturing industry views this latest venture with some scepticism—it is still regarded by them as something of a shot in the dark. While we wholeheartedly endorse the principles which are embodied in the Convention, which were expounded to us so enthusiastically by the Chief of Defence Procurement, it is only by its works that OCCAR will be justified. We expect, as we have made clear, to see evidence of its achievements reported regularly to Parliament. Under the terms of the Convention, for the three years following its entry into force, the Board of Supervisors will have the power to take action to restore the workshare balance if any member state receives less than 66 per cent of its financial contribution 'concerning a programme, a certain phase or a certain sub-assembly of a programme' or if a global imbalance of more than 4 per cent is identified in relation to all programmes. At the end of the three years, a decision will be taken on whether this procedure can be repealed.[87] We recommend that, when the balanced workshare provisions of the Convection are reconsidered, the UK will press for the remnants of juste retour to be permanently abandoned. We trust that our successor committee will monitor these developments with a view to ensuring that the treaty revisions will be in the UK's best interests.

30. Like any treaty which has been voluntarily entered into, the OCCAR Convention represents a sharing of national sovereignty (in this case the ability to exercise untrammelled political control over the design and supply of equipment and the ability to protect national industry) in the pursuit of a trans-national objective (a stronger European defence industry). But as with any such inter-governmental deal, there is a strong element of enlightened self-interest at work. In this case that self-interest is grounded in the belief that through OCCAR our Armed Forces will obtain cheaper, better and more useful equipment, and that our defence industry will have access to more open markets on the basis of real competition. In endorsing the ratification of this treaty, Parliament must be confident both that national self-interest will be protected, and that the wider aims can be realised. That confidence can only be based on a conviction that all the necessary accountability mechanisms are in place and will be effective. We regret that to some extent we are being asked to take much on trust as regards the methods of holding OCCAR to account. However, assurances have been offered to us in this regard, and we intend to play our part in ensuring that they are honoured. OCCAR must not be allowed to decline into the condition of stalemate which has rendered so many previous collaborative ventures impotent. On the basis of those promises of effective and rigorous accountability, and on the understanding that this treaty will lead to the ultimate abolition of any remnant of juste retour, we recommend that the OCCAR Convention should be ratified, and that the House should give its approval to the Order in Council to give effect to that ratification.

13 Known by the acronym of its French title, Organisation Conjointe de Cooperation en matière d'Armement. Back

14 Cm 4367, June 1999 Back

15 Q 6 Back

16 Q 41 Back

17 Q 55 Back

18 Third Report, Session 1997-98, NATO Enlargement, HC 469 Back

19 ibid, paras 105-106 Back

20 See Erksine May's Treatise on the Law, Privileges, Proceedings and Usage of Parliament, ed. Limon and McKay, 22nd Edition, p 226 Back

21 EDM 828 of Session 1998-99 Back

22 Ev p 17 Back

23 Annex of the MoD's Performance Report 1997-98 (Cm 4170) lists the 47 collaborative projects including the UK Back

24 Eighth Report, Session 1997-98, The Strategic Defence Review, HC 138-I, paras 303-319 Back