Conclusions and recommendations
1. The
performance of the Defence Procurement Agency in 2002-03 can only
be described as woeful. On the somewhat optimistic assumption
that no further slippage is experienced, major equipment projects
will on average be delivered to the end user a year and a half
late. The substantial in-year cost increases of some £3.1
billion will have a major impact on the current equipment plan
and must inevitably lead to cancellations or cuts in equipment
projects, or delays in ordering equipment. Such substantial cost
increases are also likely to have an impact beyond defence procurement
and result in cuts elsewhere. Given the recent pressures on our
Armed Forces we believe such impacts would be unacceptable. (Paragraph
12)
2. We find it immensely
disappointing that the Smart Acquisition initiative, launched
some six years ago, has yet to deliver its aim of procuring equipment
faster, cheaper, better. We are particularly concerned that it
will still be some time before poor performance is reversed and
the expected benefits from Smart Acquisition delivered. We are
forced to conclude that our Armed Forces have been let down by
the organisation tasked with equipping them. (Paragraph 19)
3. The Chief of Defence
Procurement's assessment of the Defence Procurement Agency identified
long-running systemic problems and a failure to implement the
principles of Smart Acquisition. We regret that both his predecessor
and the current Minister for Defence Procurement failed to act
earlier to address, what even the latter referred to as, 'some
things which have been endemically wrong for some time that we
still haven't sorted out'. (Paragraph 21)
4. It comes as no
surprise that a key underlying cause of poor performance, in terms
of delivering projects to time and cost, has been MoD's failure
to invest enough money and time to sufficiently de-risk projects
in the Assessment Phase. This is a concern which we, our predecessors,
and the National Audit Office, have highlighted over the past
20 or so years.[226]
MoD now proposes to spend more money and time in the Assessment
Phase. We welcome this intention, but given past failures to address
this longstanding problem we are still to be convinced that it
will be implemented in practice. (Paragraph 28)
5. It is, again, very
disappointing that another principle of Smart Acquisition—the
routine trade-offs between performance, time and cost—has
not been implemented as intended. Without such trade-offs, time
slippage and cost increases occur. We expect the Defence Procurement
Agency and MoD to address the reasons which have, to date, limited
the use of trade-offs, and to monitor the use of such trade-offs.
(Paragraph 32)
6. Whole-Life Costing
is another key principle of Smart Acquisition which has yet to
be implemented. While we acknowledge that some progress has been
made in this area, we expect MoD to ensure that the whole-life
cost data currently being produced is refined further so that
it can support decision making. (Paragraph 37)
7. Delays in MoD decision-making
result in a great deal of uncertainty and expense for defence
companies. For some companies, particularly smaller ones, there
is a risk that such delays can lead to them going out of business.
We expect MoD, to consult with industry on this matter, and to
push forward with its efforts to identify and implement quicker
decision making processes. (Paragraph 41)
8. We consider it
essential that the Defence Procurement Agency's approach to contracting,
and procurement generally, aligns with best practice. Although
action is now being taken, we find it surprising that, some six
years after Smart Acquisition was introduced, the Agency has only
recently made concerted efforts to identify best practice elsewhere
and reflect this in its own arrangements. We would expect a major
procurer, such as the Defence Procurement Agency, to be constantly
abreast of best practice elsewhere and to update its arrangements
accordingly. We recommend that the Agency do so in future. (Paragraph
44)
9. It is unsatisfactory
that Legacy projects are measured against a 50 per cent approval
while Smart Acquisition projects are measured against a 90 per
cent approval, and we therefore welcome the move to reporting
project performance against the 50 per cent estimate for all projects.
This should eliminate any misunderstanding among project leaders
as to what they are expected to deliver. Time will tell if the
new organisational changes at the Defence Procurement Agency provide
the clear direction to project leaders which has been lacking
to date. We recommend that the Agency's senior management monitor
the effectiveness of the new organisational arrangements in this
regard. (Paragraph 49)
10. A combination
of what has been called a 'fear culture' at the Defence Procurement
Agency and an ineffective internal review process has resulted
in problems on projects being hidden and going undetected. The
Chief of Defence Procurement must ensure that there is a culture
change at the Agency which encourages problems on projects to
be disclosed. We also expect senior management at the Agency to
have accurate and timely information on the status of projects.
The proposed new assurance arrangements should, therefore, be
introduced as a matter of urgency and regularly reviewed to assess
their effectiveness. (Paragraph 53)
11. The new Key Targets
for the Defence Procurement Agency should provide a better measurement,
and be more representative, of the work that it undertakes. We
welcome the addition of a new target covering asset delivery,
which should ensure that the Agency focuses its attention on delivering
to the front line—something which has often been lacking
in the past (Paragraph 57)
12. We consider it
important that the National Audit Office continues to validate
the performance of the Defence Procurement Agency against the
new set of key targets, particularly as the targets for cost and
time slippage will now cover a much larger number of projects.
(Paragraph 57)
13. We support the
changes set out in 'A Stocktake of Smart Acquisition in the Defence
Procurement Agency—The Agreed way forward'. But they appear
to us to go well beyond a 're-invigoration' of Smart Acquisition.
Instead, they represent a fundamental overhaul of an initiative
which, after some six years, had not been implemented as intended.
We plan to monitor both the progress in implementing the changes
and the improvements which are expected. In order to do so, we
recommend that regular reports on the implementation of Smart
Acquisition are provided to Parliament. (Paragraph 60)
14. MoD estimates
that Smart Acquisition has resulted in savings of £2 billion.
However, given that the Chief of Defence Procurement has acknowledged
that only one of the seven principles of Smart Acquisition had
been implemented, we have no confidence in the reliability of
this estimate. Indeed the programme of Smart Acquisition was created
and named by government, but does not necessarily define the ultimate
standards in defence procurement. Success in defence procurement
should be measured by objective standards and not just by reference
to the seven principles that the MoD has itself adopted. In future,
we expect estimates of savings resulting from Smart Acquisition,
or indeed resulting from other MoD initiatives, to be independently
validated. (Paragraph 63)
15. We are pleased
to learn that good progress is being made on both the Astute and
Nimrod programmes, and that the contractor is confident of delivering
the programmes in accordance with the revised arrangements. On
Astute, MoD and the contractor need to identify a way forward
which ensures that vital submarine design skills are retained,
particularly given that the Astute submarines are likely to require
major refits in the future. We recommend that MoD sets out in
its reply to this report its assessment of what it needs, particularly
in terms of Defence Procurement Agency staff of sufficient seniority,
at Barrow, where the submarines are being built, to ensure that
it is kept fully abreast of developments on this previously troubled
programme. On Nimrod, MoD needs to ensure that a decision on the
programme is announced in a timescale which will ensure that the
in-service date is met and that the skills of the current workforce
are not lost. (Paragraph 70)
16. We consider it
vitally important that defence equipment programmes, particularly
of the scale of the Future Carrier programme, are properly de-risked
and we support the sensible decision to continue with the Assessment
Phase on this programme. Publicly announcing the expected costs
and in-service dates for the Future Carrier programme before the
risks had been properly assessed was a mistake from which MoD
must learn. We are pleased to learn that the 'alliance' discussions
are progressing well and expect MoD to reach agreement on the
revised arrangement as soon as possible. (Paragraph 80)
17. It is vital that
when the Future Carriers enter service they have their offensive
airpower capability, which is to be provided by the STOVL variant
of the Joint Strike Fighter. However, it is unclear whether the
weight problems currently affecting this variant of the Joint
Strike Fighter can be solved to achieve the required performance
and, even if they can, how this might affect the planned in-service
date. We note that the Minister for Defence Procurement expects
the problems to be resolved—this is an issue which we plan
to monitor closely. (Paragraph 84)
18. We support the
decision to adapt the second tranche of Eurofighter Typhoon aircraft
to multi-role, as this will ensure that the UK gets the capability
it needs in a changed environment. However, we are concerned that
there appears to be a wide disagreement between MoD and industry
on how much the necessary enhancements will cost. We find it surprising
that MoD considers that there will be little impact on the total
cost of the programme, unless there are also plans to reduce the
size of the third tranche. We expect MoD to conclude negotiations
and place an order for the second tranche as soon as is possible.
(Paragraph 90)
19. We welcome the
announcement that an assessment phase contract for FRES will be
placed in late 2004, but remain concerned that the in-service
date of 2009 will not be met—a concern shared by industry.
This is another example, like the Future Carrier, where MoD appears
to have announced an in-service date for an equipment before the
assessment phase work required to substantiate that date has been
undertaken. (Paragraph 97)
20. We are concerned
that there are signs that Watchkeeper's initial operating capability
is likely to be later than was being forecast last year. This
appears to support the conclusion we drew last year—that
MoD is still finding some difficulty in balancing increased procurement
agility against decreased risk. If this is to be done successfully,
it is important, in the assessing of bids, that the technical
and Defence Industrial Policy issues are considered concurrently.
Failure to do so may not only lead to unnecessary levels of risk
but also to delays in the decision making process. We expect MoD
to identify ways to restrict any further slippage in delivering
the Watchkeeper capability. (Paragraph 100)
21. We welcome the
fact that MoD has recognised the importance of establishing an
industrial strategy to sit alongside the Defence Industrial Policy,
and that work is now in hand to take this forward. Such a strategy
needs to provide industry with a clear picture of which industrial
capabilities and technologies are considered to be of crucial
strategic importance in the future. We recommend MoD take forward
this work as a matter of urgency. (Paragraph 112)
22. We consider it
critically important that MoD develop clear criteria for deciding
which sectors of the defence industry it is vital to retain in
the future. Issues such as security of supply, in particular to
meet urgent operational requirements, should not be underestimated
in making such decisions. Much equipment being procured today
will be in-service for the next 20-30 years or more and will need
to be upgraded and maintained. The imperative of retaining the
skills within the UK to undertake such work must be recognised.
This applies across the rang of equipment: from the highest level
to the most basic of military requirements. (Paragraph 115)
23. We are concerned
that the wider factors to be taken into account in procurement
decisions are still often being considered at a late stage in
the process. We expect the Defence Procurement Agency to ensure
that additional guidance or training is provided to its staff
to address this issue. (Paragraph 118)
24. We believe that
the decision by the Secretary of States to procure the Hawk trainer
aircraft was a sensible one, which has resulted in substantial
exports for the UK. Possible exports should always be a factor
which is taken into consideration in making procurement decisions,
and which should be considered at an early point in the procurement
process. (Paragraph 123)
25. We recognise that
defence is a global industry and that consolidation in the defence
industry can bring advantages, such as gaining access to a wider
market. However, there are also possible disadvantages in that
UK defence companies which are owned by overseas companies are
more likely to be susceptible to job losses or cuts in investment
if the parent company experiences problems. It is of real concern
that in recent months, the UK's only defence helicopter manufacturer
has been taken over by an overseas company, and the UK's main
armoured vehicle manufacture was almost taken over by an overseas
company. When overseas companies bid for UK defence companies,
we expect MoD to consider fully issues of security and the impact
on competition, and make the necessary representations where appropriate.
It would be a terrible loss if the UK's remaining defence companies
merely became 'metal bashers' for overseas defence companies.
We expect MoD and the DTI to stand ready to take action to counter
this risk. (Paragraph 132)
26. We are dismayed
that a waiver for the UK from the US International Traffic in
Arms Regulations (ITAR) has still to be secured and that the introduction
of protectionist measures in the US have re-emerged. In addition
to the potential damage to both the UK and US defence industries,
there is a real risk that the close relationship between the UK
and US could be harmed. We note that the US Administration has
provided support to the UK on these matters, but it is essential
that that support is translated into real results. We again lend
our support to ministers and the MoD in addressing these issues.
(Paragraph 141)
27. Information transfer
delays, on programmes such as the Joint Strike Fighter, can prevent
co-operating industrial partners from fulfilling their contractual
obligations. We note that a Bilateral Defense Acquisition Committee,
involving the UK and US, has been established and that it is tasked
with developing and co-ordinating efforts to improve information
and technology exchange including the timely release of classified
and sensitive information. We note that MoD considers that, on
the Joint Strike Fighter programme, the necessary data and technical
information is now being exchanged, and we expect MoD to ensure
that this remains the case. (Paragraph 145)
28. For the Defence
Industrial Policy to succeed, it is important that there is a
constructive relationship between MoD and the defence industry.
We are disappointed to learn that there have been difficulties
in the relationship between the MoD and the UK's largest defence
contractor—BAE SYSTEMS. We note that both MoD and BAE SYSTEMS
recognise the need to rebuild their relations, and we encourage
them to push forward with their efforts to do so. (Paragraph
148)
226 See previous Defence Committee Reports on Procurement,
www.parliament.uk/parliamentary_committees/defence_committee.cfm
and NAO Major Projects Reports, www.nao.gov.uk. Also see Ev 80-107. Back
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