Select Committee on Defence Sixth Report

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, and NAO Major Projects Reports, Also see Ev 80-107. Back

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