Memorandum by Tony Purton[10]
In view of the highly political nature of UK
defence procurement and the need perceived by all parties in the
House to foster an effective and sustainable UK defence industry,
it is time to consider a return to the non-competitive "cost-plus"
procurement regime abandoned by MoD in 1985 in favour of competition
and the commercial approach.
Advances in the facilities and techniques for
effective real-time management and control of defence project
timescales and costs through techniques such as Earned Evaluation
Management (EVM) should make it possible to prevent the run-away
costs that prompted the 1985 reforms. The civil sector is said
to be making use of such techniques to manage full cost-reimbursement/no
blame/no loss contracts (eg BAA with Heathrow Terminal 5), and
MoD has acknowledged that it is studying contracting procedures
used by the oil and gas industries.
The recent re-writing of the fixed price contracts
MoD agreed with industry for the Nimrod MPA4 aircraft and the
Astute class submarines eight years ago signals the failure of
any form of commercial approach to UK defence procurement where
our own defence industry is concerned. The government that awarded
those contracts would not have been prepared politically to award
them outside the UK. The industry was put under contrived commercial
pressure to accept taut contracts; they had to secure the contracts
to remain viable. When industry failed to meet its contractual
obligations, the political imperative to rescue it from difficulties
of its own creation was overwhelming.
With its commitment to order all warships from
UK yards and systematic ministerial direction to award all major
contracts in pursuit of the government's Defence Industrial Policy
published in October 2002, there is little scope for the application
by MoD of the normal commercial judgements and pressures where
major projects are concerned. Indeed, the existence of a taut
commercial contracts binding on price, performance and timescale
simply creates difficulties for both industry and government to
work together in a spirit of partnership. The recent award of
the Advanced Hawk trainer aircraft to BAE Systems to promote job
retention and facilitate the export order to India illustrates
the nature of the political/industrial imperative in defence procurement
decisions.
If a return to "cost-plus" defence
contracting is perceived as heralding an increase in the costs
of defence projects, this should be publicly acknowledged as the
price of maintaining the UK's defence industrial capability, securing
with it UK jobs and the potential for arms export sales creating
further UK jobs; even at the expense of obtaining best military
value for the defence budget. In evidence to the Public Accounts
Committee, Mike Turner CEL of BAE Systems asserted, several times,
that any price charged by British industry for any defence product
would always be far less than the cost of an American equivalent.[11]
Senior MoD managers have given evidence at Defence
Committee hearings of the need for flexibility in a constantly
changing world. Flexibility is the last thing one gets with a
fixed price, tight timescale contract. The military want the product
to give them the military capability they perceive the need for
rather than a binding definition of an equipment configuration—they
will change their minds.
The political direction of defence procurement
decisions is now so embedded in the defence management system
that it is no longer possible to determine whether the problems
suffered by the MoD are of their own making or the result of the
political direction of MoD against its better judgement. At the
PAC hearing on 23 February, MoD's Permanent Under Secretary Sir
Kevin Tebbit explained the process of ministerial decision-making
on the Advanced Hawk trainer order that clearly shows that MoD
is constitutionally prevented both from divulging the advice it
gives to ministers or the directions it receives from ministers.
This is due to changes in the Treasury's Guidance to Accounting
Officers in 2001 introducing new paragraphs 10 & 11 as a result
of recommendation 34 of the Cabinet Office report "Wiring
it up". These paragraphs encouraged "cross-cutting"
to promote "joined up government". There are now almost
no circumstances under which MoD's Accounting Officers can challenge
ministers who ignore their advice. The last open ministerial direction
under the old paragraphs 13, 14 & 15 was in 1994 when defence
secretary Malcolm Rifkind announced in the House that he had over-ridden
the advice of his Chief of Defence Procurement (Malcolm McIntosh)
to split the order for the RAF's Support Helicopters between the
Chinook and the EH101 Merlin.
The MoD still has in place the accounting conventions
for non-competitive government contracting. Despite an abortive
Treasury-led attempt in 1999 to re-write these conventions, they
are now undergoing a general review under the aegis of The Review
Board for Non-competitive Government Contracts, the results of
which should be announced later this year.
The US DoD has a long history of defence procurement
cost management monitored by the Congress through the General
Accounting Office (GAO). Fixed price contracting for US major
weapon systems production was abandoned in the 1960s as a result
of problems with the Lockheed C5A transport aircraft and Corsair
7 combat aircraft options contracts. The US Defense Contract Management
Agency has recently completed a programme of modernisation of
its cost monitoring systems to make them less bureaucratic and
more project management orientated. It has taken the UK more than
40 years to realise that this is the sort of regime needed in
the UK if government priority is the protection of our domestic
defence industry.
There is also a legal argument supporting a
return to non-competitive contracting where political pressures
to award the contract domestically are present. In two cases[12]the
House of Lords Privy Council condemned the rigging of competitive
tenders. Their Lordships emphasised "The duty to act fairly
meant that all tenderers had to be treated equally." The
implication of these cases is that where a contracting authority
invites competitive tenders there is an implied contract that
the authority will decide the award of contract against the terms
set out in the tender documents and not against some pre-determined
or post-bid-generated political agenda.
This means that the MoD should seek ministerial
direction before it invites any tenders rather than after the
bids are received. In his evidence to the PAC on 25 February 2004,
MoD's Chief of Defence Procurement Sir Peter Spencer expressed
his intention to clear his political lines before inviting tenders
in future.[13]
Sir Peter is, after all, the official who would stand accused
of "misfeasance in public office" for the abuse of the
tendering process.[14]
April 2004
10 Former MoD career (32 years) procurement expert.
MoD Director of Contracts 1988-93. Author of MoD's Legal Awareness
guidance extant 1991-2002. Back
11
PAC corrected evidence 23 February 2004 Questions 5, 7, 34, 66,
77. Back
12
Harmon v House of Commons and Pratt Contractors v Transit New
Zealand. Back
13
Corrected evidence Q185. Back
14
See House of Commons v Harmon. Back
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