House of Commons - Public Accounts

Select Committee on Public Accounts Seventeenth Report

SEVENTEENTH REPORT

The Committee of Public Accounts has agreed to the following Report:

MINISTRY OF DEFENCE: MAXIMISING THE BENEFITS OF DEFENCE EQUIPMENT CO-OPERATION

INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS

1. Defence equipment co-operation covers defence research, the development and production of new equipments and the joint support of equipments (which may or may not have been procured co-operatively) once they have entered service. In 1998/99, the Ministry of Defence (the Department) spent some 13 per cent (£1.3 billion) of the defence equipment budget co-operating with 19 partner nations on 64 programmes.[1]

2. The 1998 Strategic Defence Review stated that "International collaboration is of increasing importance to our forward equipment programme. It offers tangible military, economic and industrial benefits and it is essential that the United Kingdom remains at the forefront of developments in this area of joint endeavour." [2] The track record of defence equipment co-operation to date has been mixed; with potential benefits not being secured fully on a significant number of programmes. However, a number of recent initiatives hold the prospect of addressing many of the challenges of co-operation. On the basis of a report by the Comptroller & Auditor General.[3] our predecessor Committee took evidence from the Ministry of Defence on the successes and challenges of defence equipment co-operation, factors influencing successful co-operation, and the way decisions to commit to co-operative programmes are made.

3. Our main conclusions are as follows:

Defence equipment co-operation has been successful in delivering economic, military, industrial and wider political benefits through joint research and development and the co-production and support of equipments once equipment has entered service. These successes have not been achieved across the board but we note the efforts being made by the Department and its partners to address the challenges. There are, however, some aspects of co-operation where complete solutions are unlikely, notably in the area of preventing delays caused by partners' decision-making and funding approval processes.

Experience in the field of co-operation points to a number of lessons which could help to determine which future projects have best chance of success, if taken forward on a co-operative basis. These lessons include the importance of having a capable prime contractor, making pragmatic decisions on the right programme arrangements to meet the circumstances of each capability required, and fully assessing the risks associated with co-operation. The Department should pay particular attention to these success factors in deciding whether to co-operate and, if co-operation does take place, what form the co-operation should take.

Arrangements in place on programmes such as the Tomahawk Land Attack Missile illustrate the potential of co-operation to reduce in-service costs, which typically account for more than half of the whole-life cost of an equipment. The extent of co-operation once equipments enter service is, however, often limited. Problems have risen because the Department has not paid sufficient attention to in-service co-operation at an early stage in the programme. In future, the Department should agree, in a timely manner, co-operative support strategies on all programmes.

4. This Committee's detailed conclusions and recommendations are as follows:

The challenge of successful defence equipment co-operation

(ii) A key advantage of co-operation is the sharing of the huge non-recurring costs of developing new military equipments. Co-operating with the United States can mean that the Department gains disproportionate financial benefit from its status as a junior partner. In Europe, the fact that there are more potential partners means that costs should be shared more widely although, to date, the benefits of such sharing have not been maximised. The Department accepted that it would be essential to do better in future projects if the new European Meteor missile programme was to deliver the savings anticipated. We shall follow the progress of the programme closely. (Paragraph 19)

(iii) Co-operation in the production of defence equipment should lead to savings by increasing economies of scale in manufacturing. However, inefficiencies in co-operative production have meant that, in the past, the economies of scale achieved have been in the region of half those on national programmes. Lessons learned from experience on programmes such as the Guided Multiple Launch Rocket System will need to be adopted more widely in future. (Paragraph 20)

(iv) The Department has agreed common strategies for some aspects of aircraft support on the Eurofighter programme. Nevertheless, more than a decade after the Eurofighter development programme began, the Department still has not agreed an overall common support strategy with its partners. (Paragraph 21)

(v) Co-operative programmes have often been characterised by inefficient management structures and practices. The Department has made great efforts to explain its Smart Acquisition process to partners. The management procedures of the new joint French, German, Italian, United Kingdom armaments agency—OCCAR—will also be based largely on Smart Acquisition. These moves should help, particularly for programmes within OCCAR, to address the past shortcomings. As with the United Kingdom experience of Smart Acquisition, we expect the Department to be able to provide evidence that the anticipated improvements are being secured. (Paragraph 22)

(vi) Only three of the five measures proposed by the National Audit Office to measure OCCAR's success will be reflected in the OCCAR business plan. The Department should ensure that the outstanding measures, to address administrative efficiency and overhead, are agreed as quickly as possible. (Paragraph 23)

(vii) The Chief of Defence Procurement vividly described the detailed worksharing requirements which have characterised much defence equipment co-operation as "a tax on defence". The Department is confident that the "global balancing" of work between programmes which OCCAR will champion will improve the situation. The Department should work with its partners to ensure that, in future, parochial interests on individual projects do not jeopardise the introduction of global balancing and that measures are established to monitor its successful introduction. (Paragraph 24)

(viii) Almost two-fifths of the delays on co-operative acquisition programmes are caused by co-operative factors. Some of the reasons for delays, such as weaknesses in industrial management, should be capable of being addressed. Other factors, such as reducing the time taken for partners to make decisions to co-operate and to secure funding through different national approvals processes, are more intractable. The Department should factor the potential for such delays into its analyses in deciding whether to commit to co-operative programmes. (Paragraph 25)

Factors influencing successful co-operation

(x) There are already a few examples where industry has played a formative role in a co-operative programme. The opportunities for industry to take a greater role in fostering co-operation are likely to increase in future, given the emergence of a smaller number of global companies with a wide range of capabilities and financial resources as a result of the re-structuring of the industry. The commitment of capable prime contractors in the industry is likely to be a key success factor in future co-operation. The Department's acquisition strategies should be designed, therefore, to ensure it makes best use of the potential they offer. (Paragraph 36)

(xi) Attempting to achieve complete commonality of design on co-operative programmes has often been a difficult and lengthy process; and the Department has recognised that that option may not always be the best way to maximise benefit from co-operation. The frigates being designed on the Project Horizon programme would have had a common Combat Management System which was not compatible with those fitted to other United Kingdom warships. The approach taken by the alternative German, Dutch, Spanish programme, where co-operation was limited to aspects where there was commonality of requirement, has led to a more successful outcome with the frigates likely to enter service some five years before the United Kingdom Type 45 frigates. The Department should be ready to adopt a range of approaches either from acquiring a completely common design to common elements of capability, or by acquiring equipment off-the-shelf and co-operating in support when it has entered service. (Paragraph 37)

(xii) Once an equipment has entered service, differences in the way nations have operated, maintained and upgraded equipments it have negated the benefits envisaged by seeking complete commonality of design. In future, where the potential advantages of commonality are seen to be sufficient to warrant the effort involved (as they are on Eurofighter for example), the securing of benefits will require a system which clearly identifies the design status of each equipment and facilitates common modification. (Paragraph 38)

(xiii) The Medium and Long Range TRIGAT anti-tank missile programmes, highlight the risks of co-operation. The Department spent some £300 million for no return and there was a substantial risk of an unacceptable gap in operational capability. Taken together with experiences on other programmes such as Project Horizon, these projects suggest that co-operation may not always be the best course. The most successful co-operative programmes are likely to be those where the risks are well understood and closely managed. (Paragraph 39)

How decisions to commit to co-operative programmes are made

(xv) The Department is confident that, in most cases, the wider benefits of co-operation are secured and it cited positive examples, such as the commitment to the A400M aircraft programme being sustained by BAE Systems leadership in wing design. The examples given by the Department were ad hoc and the only overall analysis to which it referred was undertaken by the National Audit Office. Working with other government departments and industry, the Department should introduce a more formalised and robust methodology to assess whether the anticipated wider benefits are being achieved in practice on all programmes. (Paragraph 46)

(xvi) The Accounting Officer made it clear that, whilst he did consult other interested government departments to solicit their views, his duty was to recommend to Ministers the option which offered best value for money for defence. He stated that wider factors were relevant in offering this advice but did not drive the project unless the decision was marginal, in which case it was legitimate to take into account such factors unless there was a substantial premium attached to them. Given this assurance, we assume that on the three decisions where wider factors were central - Storm Shadow, Medium Range TRIGAT and A400M—the premium paid was small compared to the wider benefits anticipated. (Paragraph 47)

THE CHALLENGE OF SUCCESSFUL DEFENCE EQUIPMENT CO-OPERATION

5. Co-operation in defence research offers economic and technological benefits, generating a 5:1 return on the Department's £40 million annual investment on joint research programmes and providing knowledge with an annual value of approximately £280 million at minimal cost through information exchange programmes.[4] When asked where the greatest opportunities for co-operative research lay, the Department replied that it was planning to do more in the research field with both Europe and the United States. It said that it had always had a strong relationship with the United States on research, but had a more fragmented relationship within Europe. It was poised to make a major step for the better within Europe with the EUROPA Memorandum of Understanding, which would create more transparency and facilitate common arrangements. The Department hoped the Memorandum of Understanding would be signed by Ministers in May.[5] At a national level, the Department is developing a model to help focus research effort in selected areas which has potential application for wider defence research co-operation following the formation of transnational defence companies.[6]

6. The cost of research and development for modern defence projects is usually so great that it is difficult for any one nation to fund it without collaborative partners. As the Department noted, even the United States looks for collaborative partners when it is developing a modern, major equipment system.[7] We asked where the opportunities were greatest for cost savings, and the Department replied that, with the United States, it was usually as a junior partner but, because of that, it tended to benefit disproportionately through the investment the United States had put in.[8] There was more unrealised scope for savings through collaboration in Europe, with a number of different countries involved, there was a greater risk that the cost of collaboration would be high. In introducing more partners, as it had done on Meteor, it would be very important indeed to keep those development costs under control.[9]

7. The economic benefits of co-operative production derive from economies of scale in manufacturing. Achieving such cost reductions assumes, however, that production is undertaken in the most efficient manner. That has not been the case for many co-operative programmes. Efficiency has often been compromised by a rigid adherence to the principle of worksharing—where national costshares on individual programmes and programme elements are precisely matched to national workshares—leading to the artificial splitting of work packages and their allocation other than on the basis of minimum cost. Concerns regarding security of supply, and national efforts to obtain high technology work and protect employment, have led to the establishment of multiple production lines with corresponding losses of economies of scale.[10]

8. There are signs on recent programmes that partners are becoming more pragmatic in structuring co-operative production and that cost considerations are resulting in more rationalised production arrangements. For example, the Guided Multiple Launched Rocket System is currently in the early stages of development. The proposed procurement strategy takes into account lessons learnt from the initial procurement of the Multiple Launched Rocket System. Although the partner nations will not enter into any binding agreements until development is complete, the principles for collaborative production have been agreed with the aim of achieving broadly equitable worksharing subject to value for money considerations.[11]

9. There is much less evidence of co-operation in supporting equipments once they have entered service. Only 20 per cent of equipments currently in service incur more than half of their annual in-service support costs on a co-operative basis because of differences in nations' operating and maintenance philosophies and national "customisation" of designs.[12] The costs of supporting an equipment once it has entered service account, however, for a significant proportion of an equipment's through-life costs, and all but four of the co-operative programmes in which the Department is involved either have, or intend to incorporate, some measure of in-service co-operation.[13] Figure 1 lists some examples of the benefits of co-operative in-service support.

Figure 1: Examples of the benefits of co-operative in-service support
Tomahawk Land Attack Missile	The United Kingdom support strategy was primarily driven by existing United States support arrangements and has benefited from economies of scale through joint purchasing of spares and shared maintenance facilities.[14]
Spey, Olympus and Tyne marine engines	The arrangements in place between the United Kingdom, the Netherlands, France and Belgium have resulted in annual savings of 30 percent in the costs of Post Design Services and 20 percent through the pooling of spares stocks on Spey marine engines.[15]
Multiple Launch Rocket System	A single configuration control system, run from the United States, has ensured that there is some 95 percent commonality between partner nations' MLRS systems. Additionally, for partner nations' assets based in Europe (including those of the US Army), a dedicated agency under NATO auspices manages a collaborative spares procurement and repair function.[16]

10. When the Department was asked what it considered an appropriate level of co-operation to aim for on future in-service equipments, the Department replied that insufficient attention had been paid in the early phases of programmes to the in-service support arrangements. The incorporation of Smart Acquisition whole-life approaches into co-operative arrangements, and the way OCCAR was being structured to run collaborative projects would, in future, increase the in-service support element.[17]

11. On the Eurofighter programme, despite the assessment of logistic support issues throughout the development programme, differing operating and maintenance philosophies have meant that partner nations have been comparatively late in defining the scope for common support strategies.[18] Asked why there were still problems agreeing common support strategies, the Department said that it had already put in place systems and organisations to improve on the previous generation Tornado. A lot of weapons aspects for Eurofighter would be done through the international weapons support system and the industrial repair activity would operate within a common harmonised contract for industrial exchange and repair services.[19] The Department also pointed out that, for the Joint Strike Fighter, it had already set up a Logistics Support Council at the concept definition stage in order to give guidance on what the joint UK/US support structure should be. [20]

12. In the past there has been considerable variety in both governmental and industrial management arrangements for co-operative procurement. Complex management and decision-making structures as well as restrictive worksharing and other requirements have often been necessary in achieving international agreements.[21] The Department has put a great deal of effort into responding to requests from its co-operative partners to explain the potential benefits of "Smart Acquisition".[22] The Chief of Defence Procurement said that some of the methods used in Smart Acquisition were appropriate to collaborative programmes, most obviously in reducing the number of decision points which were often a cause of delay. For example, on TRIGAT the Department had waited for two years for a decision before eventually it became quite evident that two of its partners were not going to sign.[23]

13. Germany, France, Italy and the United Kingdom have jointly developed the Organisation Conjointe de Cooperation en matière d'ARmement (OCCAR) which has the potential to bring a significant improvement in the efficiency and effectiveness of European armaments co-operation.[24] The Chief of Defence Procurement said that OCCAR was a very different sort of structure from previous international collaborative organisations and that it would institutionalise best practice as opposed to each project starting off with a clean sheet of paper. In particular, OCCAR has a Director, a proper Board of Supervisors, Programme Managers who will report to the Director and a real project management system. The Department had proposed that it should be based on its own acquisition management system.[25]

14. One purpose of OCCAR was to get away from the precision about workshares that had bedevilled collaborative work for years and which the Chief of Defence Procurement called "a tax on defence". Instead OCCAR was trying to set up an arrangement called global balance where a lower share on one programme would generate a credit on the next one.[26]

15. The Department said that OCCAR would have measurable targets for performance.[27] The National Audit Office report proposed five possible performance measures covering programme time, programme cost, equipment performance, administrative efficiency and administrative overhead.[28] In explaining how OCCAR's measures corresponded to those proposed by the National Audit Office, the Department said that the measures would not be completely congruent with them but that the first three—the familiar major projects disciplines of time, cost and performance—would be there. The Department was not clear whether there were detailed measures at present to cover administrative efficiency and overhead but said that right from the start the question of how OCCAR was actually going to deliver better results for less cost had been central.[29]

16. The census of co-operative programmes undertaken by the National Audit Office showed that procurement timescales on the 36 co-operative procurement programmes in which the Department was engaged had slipped by an average of 28 months with some 11 months (39 percent) attributed to co-operative factors.[30] The most significant cause of delay —accounting for 78 months slippage across 6 programmes—was organisational. For example, on the Principal Anti-Air Missile System element of the Common New Generation Frigate programme, the weakness of the tri-national Joint Venture Company resulted in a 19-month delay. This company was especially formed for the project. As such it had no separate commercial logic behind it, and was difficult to establish as a successful prime contractor.

17. Two other important causes of slippage on co-operative programmes, accounting for slippage totalling 110 months across 7 programmes, were the delays incurred while co-operative partners decided whether to commit to future phases of a programme, and delays in securing funding for future phases resulting from partner nations' financial profiles and budgetary constraints.[31] The Department said that it did not have an estimate of the cost of delays, but suggested that, in general, they occurred in the decision-making period when money was not being spent.[32]

Conclusions

18. Co-operation in defence research offers the prospect of access to a wider technology base and is estimated to provide a fivefold return on the Department's investment. The Department is confident that it can build on the existing strong relationship with the United States, and that research co-operation in Europe will also increase once the EUROPA Memorandum of Understanding is in place. The Department's new approach to allocating defence research funding should also encourage co-operation not just with other national governments, but with industry. In taking forward the initiatives, the Department needs to measure the benefits it expects to secure and how closely the outcomes of co-operative research match up to those benefits.

19. A key advantage of co-operation is the sharing of the huge non-recurring costs of developing new military equipments. Co-operating with the United States can mean that the Department gains disproportionate financial benefit from its status as a junior partner. In Europe, the fact that there are more potential partners means that costs should be shared more widely although, to date, the benefits of such sharing have not been maximised. The Department accepted that it would be essential to do better in future projects if the new European Meteor missile programme was to deliver the savings anticipated. We shall follow the progress of the programme closely.

20. Co-operation in the production of defence equipment should lead to savings by increasing economies of scale in manufacturing. However, inefficiencies in co-operative production have meant that, in the past, the economies of scale achieved have been in the region of half those of national programmes. Lessons learned from experience on programmes such as the Guided Multiple Launch Rocket System will need to be adopted more widely in future.

21. The Department has agreed common strategies for some aspects of aircraft support on the Eurofighter programme. Nevertheless, more than a decade after the Eurofighter development programme began, the Department still has not agreed an overall common support strategy with its partners.

22. Co-operative programmes have often been characterised by inefficient management structures and practices. The Department has made great efforts to explain its Smart Acquisition process to partners. The management procedures of the new joint French, German, Italian, United Kingdom armaments agency—OCCAR—will also be based largely on Smart Acquisition. These moves should help, particularly for programmes within OCCAR, to address the past shortcomings. As with the United Kingdom experience of Smart Acquisition, we expect the Department to be able to provide evidence that the anticipated improvements are being secured.

23. Only three of the five measures proposed by the National Audit Office to measure OCCAR's success will be reflected in the OCCAR business plan. The Department should ensure that the outstanding measures, to address administrative efficiency and overhead, are agreed as quickly as possible.

24. The Chief of Defence Procurement vividly described the detailed worksharing requirements which have characterised much defence equipment co-operation as "a tax on defence". The Department is confident that the "global balancing" of work between programmes which OCCAR will champion will improve the situation. The Department should work with its partners to ensure that, in future, parochial interests on individual projects do not jeopardise the introduction of global balancing and that measures are established to monitor its successful introduction.

25. Almost two-fifths of the delays on co-operative acquisition programmes are caused by co-operative factors. Some of the reasons for delays, such as weaknesses in industrial management, should be capable of being addressed. Other factors, such as reducing the time taken for partners to make decisions to co-operate and to secure funding through different national approvals processes, are more intractable. The Department should factor the potential for such delays into its analyses in deciding whether to commit to co-operative programmes.

FACTORS INFLUENCING SUCCESSFUL CO-OPERATION

26. In July 1998, Defence Ministers of France, Germany, Italy, Spain, Sweden and the United Kingdom signed a Letter of Intent designed to facilitate defence industrial restructuring in Europe. It identified six main issues to be addressed, and, following further work, a Framework Agreement was signed in July 2000. In a parallel move, the United Kingdom and United States agreed a Declaration of Principles in February 2000 which acknowledged that past efforts to improve the level of defence equipment co-operation had not realised their full potential, and which identified specific areas where both nations intended to seek improvements to the co-operative framework.[33] The issues covered by the Letter of Intent and Declaration of Principles are summarised in Figure 2.

Figure 2: Issues covered by the Letter of Intent Framework Agreement and Declaration of Principles[34]
Issue	Letter of Intent Framework Agreement	Declaration of Principles
Security of Supply	*	*
Export Procedures	*	*
Treatment of Technical Information	*	*
Security of Information	*	*
Research and Technology	*	*
Harmonisation of Military Requirements	*	*
Ownership and Corporate Governance		*
Promoting Defence Trade		*

27. The Department emphasised, in explaining when it expected the success of the Letter of Intent and Declaration of Principles to become apparent and how it would measure this, that the areas covered by the agreements were ones where it simply had to make collaboration work better and that these areas were partly designed to make industry more efficient. For example, the Department said that the Letter of Intent would provide both it, and industry, with the assurance that whatever they wished to do, whether inside a full collaborative programme or outside it, they would be able to get security of supply and all the other factors shown in Figure 2.[35] On the Declaration of Principles, the Department emphasised, first, that the Declaration stated very clearly that United Kingdom companies operating in the United States would be no more disadvantaged than would American companies in the United Kingdom, and second, that industry was getting its act together as well. For example, BAE Systems and Rolls Royce had both acquired substantial interests in American industry and BAE Systems sold more in the United States than in the United Kingdom.[36]

28. The Department said that measuring the success of the Letter of Intent and Declaration of Principles was tricky since those arrangements were not fully in place, and that measuring something which was dependent upon facilitating industrial participation, co-operation and security of supply was rather harder than something which was purely controlled by Government. It did, however, point out that, since December 1997, there had been an unprecedented degree of trans-national industrial consolidation in the European defence sector. If there was not a Letter of Intent, the degree of rationalisation would have been much less.[37]

29. The restructuring of the defence industry following the end of the Cold War has produced a smaller number of companies, certainly at the prime contractor level, but most of them have a wider range of capabilities, operate in more countries than their predecessors and some of them have the financial resources to assist in Private Finance Initiative and Public Private Partnership schemes.[38] Asked whether trans-national companies or governments would lead co-operation in future, the Department said that it encouraged companies to follow their own commercial judgements because that was the best way of establishing what was the most competitive and efficient way of operating. Governments should not be involved in the detailed workings of companies, but should insist that they got a good price and make sure that the companies were not hindered by government regulations from delivering an efficient outcome.[39]

30. There are already a few examples where industry has a formative role in co-operative programmes. France and the United Kingdom have placed separate contracts with the respective French and British subsidiaries of Matra BAe Dynamics SAS—a company jointly owned by BAE Systems and Lagardère SCA—for the development and production of Conventionally Armed Stand-Off Missiles. Each nation's separate requirements have been fully harmonised by Matra BAe Dynamics into a single common technical solution based on modifying the Apache Anti-Runway missile to meet particular French and United Kingdom needs. As well as leading on requirement harmonisation, industry is also responsible for selecting appropriate national procurement approaches to deliver the two contracts. A fully integrated Franco-United Kingdom management and engineering team supplies industry leadership in co-ordinating the programme.[40]

31. The Department's preference is to work for maximum commonality between partner nations' equipment requirements and to minimise the extent of national variants. Very few of its co-operative equipments currently in the acquisition phase are expected to include United Kingdom national variants valued at more than 30 percent of the United Kingdom share. The resolution of differences between partners' detailed requirements to achieve this degree of commonality has often been a difficult and lengthy process.[41]

32. The Department acknowledged that doctrinaire adherence to absolute commonality might not be the right approach. The tri-national Horizon frigate programme failed through insisting on total commonality. The Department doubted the value of having a combat management system on an international frigate that could not speak to its own aircraft carriers. The similar tri-national—German, Dutch, Spanish—frigate programme had adopted a much looser approach, although it had some of the benefits from co-operation by sharing non-recurring costs of weapons systems. These frigates are expected to start to enter service in 2002, some 5 years before the Type 45 destroyer (the United Kingdom national replacement for Project Horizon).[42] On Eurofighter, however, the Department said it was absolutely right to insist on commonality and that there had to be centralised configuration management on the aircraft. Otherwise, over the years, their configuration would drift apart so that common support would become an impossibility.[43]

33. The Department suggested that part of the skill in assembling international programmes was to find a partner who had essentially the same capability need in the same timetable with a real budget.[44] In the past, the ability of nations to identify potential opportunities for co-operation had been constrained by difficulties in aligning national requirements and differences in national legal systems, planning timescales, and funding and approvals processes.[45] Following the Strategic Defence Review the Department had been developing a new method of capturing, engineering and managing requirements. That approach, known as "Capability Management", recognised that the Department's previous approach, as with the approaches followed by the United Kingdom's principal national partners, focussed too much early attention on the precise characteristics of the equipment to be procured. France and Germany had been working separately on a similar approach called "Common Programming of Needs and Equipment" since 1996. By providing greater flexibility in the formative stages of programmes, Capability Management might provide a framework within which key partners could align aspirations in given areas of military capability and discuss the possibility of cost, schedule and capability trade-offs to overcome differing timescale and funding commitments.[46]

34. Asked which collaborative projects had given the poorest value for money, the Department said that it would be those it had pulled out of, and highlighted the Medium and Long Range TRIGAT missile programmes. Withdrawal had cost over £300 million plus the lost operational capability. The Department admitted that it had been fortunate that the Army had not been required to undertake active operations and there was therefore no serious operational consequence; but there could have been and the risk it ran had been very substantial.[47]

Conclusions

35. In the Department's view, the Letter of Intent agreed with its European partners and the Declaration of Principles agreed with the United States will improve the conduct of defence co-operation. Both agreements are wide-ranging and ambitious in scope and their successful implementation will be critical to the success of future co-operation. We shall look closely for evidence that the Department's confidence is borne out and expect it to be able to demonstrate the benefits being secured in practice.

36. There are already a few examples where industry has played a formative role in a co-operative programme. The opportunities for industry to take a greater role in fostering co-operation are likely to increase in future, given the emergence of a smaller number of global companies with a wide range of capabilities and financial resources as a result of the re-structuring of the industry. The commitment of capable prime contractors in the industry is likely to be a key success factor in future co-operation. The Department's acquisition strategies should be designed, therefore, to ensure it makes best use of the potential they offer.

37. Attempting to achieve complete commonality of design on co-operative programmes has often been a difficult and lengthy process; and the Department has recognised that that option may not always be the best way to maximise benefit from co-operation. The frigates being designed on the Project Horizon programme would have had a common Combat Management System which was not compatible with those fitted to other United Kingdom warships. The approach taken by the alternative German, Dutch, Spanish programme, where co-operation was limited to aspects where there was commonality of requirement, has led to a more successful outcome with the frigates likely to enter service some five years before the United Kingdom Type 45 frigates. The Department should be ready to adopt a range of approaches either from acquiring a completely common design to common elements of capability, or by acquiring equipment off-the-shelf and co-operating in support when it has entered service.

38. Once an equipment has entered service, differences in the way nations have operated, maintained and upgraded equipments it have negated the benefits envisaged by seeking complete commonality of design. In future, where the potential advantages of commonality are seen to be sufficient to warrant the effort involved (as they are on Eurofighter for example), the securing of benefits will require a system which clearly identifies the design status of each equipment and facilitates common modification.

39. The Medium and Long Range TRIGAT anti-tank missile programmes, highlight the risks of co-operation. The Department spent some £300 million for no return and there was a substantial risk of an unacceptable gap in operational capability. Taken together with experiences on other programmes such as Project Horizon, these projects suggest that co-operation may not always be the best course. The most successful co-operative programmes are likely to be those where the risks are well understood and closely managed.

THE WAY DECISIONS TO COMMIT TO CO-OPERATIVE PROGRAMMES ARE MADE

40. The National Audit Office examined 17 recent major procurement decisions involving a co-operative option to establish the key factors influencing the decisions made. All 17 decisions included some consideration of industrial and wider political factors but only seven cases were supported by quantified analyses.[48] Asked why this was so, the Department said that some of the factors were not susceptible to straightforward analysis. For example, it was very difficult to demonstrate that jobs were indeed secured in the numbers that might have been assumed beforehand.[49] The Chief of Defence Procurement said that the Department had started working more closely with the Department for Trade and Industry over the past four or five years but that it quite recognised that it needed to do more to quantify the wider industrial and political factors.[50] Referring to the recent Multi Role Armoured Vehicle project, where there were quantified analyses of demand-side and supply-side trends in both the United Kingdom and the European armoured vehicles sector, [51] the Department conceded that ten years ago it simply would not have persisted with such quantified analyses.[52]

41. In three of the 17 cases examined by the National Audit Office—Storm Shadow, Medium Range TRIGAT and A400M—wider factors were central in the decision-making process.[53] Asked whether the achievement of these wider benefits were being closely monitored, the Department said that in the case of TRIGAT they were not being achieved. On the A400M, the contract has not yet been placed but the Department was confident that the wider benefits would be secured. BAE Systems, as a shareholder in Airbus, should have wing leadership on the A400M and was introducing new carbon fibre composite technology. The Department said that it would monitor the achievement of this benefit since, if wing leadership on this project were to move overseas, it would not have achieved one of the most important industrial benefits. On Storm Shadow, the Department said that the formation of Matra BAe Dynamics flowed directly from the decision to purchase a missile which was to all intents and purposes identical to Apache, a French missile developed by Matra. As a result of ordering the same missile the two companies had come together and now had virtually the totality of the European missile capability and were almost the biggest missile company in the world.[54] The Department referred to a National Audit Office analysis which showed that, not only was co-operation expected to have wider benefits at the outset of the programme, but that, in the majority of cases, the actual benefits have been greater than anticipated.[55]

42. The Accounting Officer Memorandum was revised in April 2000 to ensure it reflected the need for joined-up government. The revised Memorandum states that: "An Accounting Officer should ensure that the impact of departmental activities on others is properly identified and, where appropriate, taken into account. For example, it might be decided that a department should contribute to a joined-up activity led by another organisation (whether in the public or private sectors) and that, even though this would not directly contribute to the achievement of the department's own objectives, it should make the contribution in view of the impact it would have on the achievement of the other organisation's objectives. The Accounting Officer will need to show that the participation represents good value-for-money overall."[56]

43. When the Department was asked to what extent the changes to the Accounting Officer Memorandum had changed the way it went about meeting the overall needs of the country, the Department replied that it hoped the changes had made little difference because the Department was already operating in a way which took into account the wider interests of government.[57] In any major equipment programme it consulted all interested government Departments initially and subsequently at Ministerial level before proceeding with a decision. Thus, the Foreign Office, the Department of Trade and Industry and the Cabinet Office together with employment and regional considerations were all pulled together in the analysis.[58]

44. The Department did not, however, believe that taking into account wider issues allowed extraneous considerations to prevail over defence objectives. The Accounting Officer had a duty to recommend on the basis of value for money for defence. That could be a long-term view, perhaps taking into account considerations of industrial capacity that might be needed in 15 years time. Other things being equal, it could legitimately take into account wider factors, though, if the premium to be paid were disproportionate, say 30 per cent, then it would not pay it.[59]

Conclusions

45. Only seven of the 17 decisions to commit to co-operative programmes examined by the National Audit Office included quantified analyses of the industrial and wider benefits. We are not convinced by the Department's argument that such benefits were difficult to quantify. The analyses performed on programmes such as the Multi-Role Armoured Vehicle indicates that quantification is possible. The Department should work closely with other government departments and industry from the outset of the acquisition process to ensure that the wider benefits are quantified and given due weight throughout the decision-making cycle.

46. The Department is confident that, in most cases, the wider benefits of co-operation are secured and it cited positive examples, such as the commitment to the A400M aircraft programme being sustained by BAE Systems leadership in wing design. The examples given by the Department were ad hoc and the only overall analysis to which it referred was undertaken by the National Audit Office. Working with other government departments and industry, the Department should introduce a more formalised and robust methodology to assess whether the anticipated wider benefits are being achieved in practice on all programmes.

47. The Accounting Officer made it clear that, whilst he did consult other interested government departments to solicit their views, his duty was to recommend to Ministers the option which offered best value for money for defence. He stated that wider factors were relevant in offering this advice but did not drive the project unless the decision was marginal, in which case it was legitimate to take into account such factors unless there was a substantial premium attached to them. Given this assurance, we assume that on the three decisions where wider factors were central—Storm Shadow, Medium Range TRIGAT and A400M—the premium paid was small compared to the wider benefits anticipated.

1 C&AG's Report, para 1.3 Back

2 Cm 3999, Supporting Essay 10, para 37 Back

3 HC 300, Session 2000-2001 Back

4 C&AG's Report, Executive Summary, para 2 Back

5 Q41 Back

6 C&AG's Report, para 3.20 Back

7 Q21 Back

8 Q44 Back

9 Q44 Back

10 C&AG's Report, para 2.9 Back

11 ibid, para 2.12 Back

12 ibid, Executive Summary, para 8 and 2.16 Back