Memorandum by the Defence Manufacturers
Association (DMA)
DEFENCE INDUSTRIAL
POLICY
1. DMA member companies, large and small,
welcomed the Government's Defence Industrial Policy (DIP) with
its declared aim of ensuring the retention of defence technology
and jobs in the UK—irrespective of the ownership of the
companies involved. Our overall conclusion, after some 20 months
of the policy being launched is that no identifiable, tangible
benefits have been delivered to date. This is unsurprising and
the policy was not expected to lead to significant change in the
short term. Other pressures on MoD budgets and procurement decisions,
the war in Iraq, policy initiatives elsewhere in Government (eg.
the new strategic Export Control Bill) and changes and imperatives
in the market place have been of more profound influence than
DIP so far.
2. The DMA believes that the successful
implementation of a DIP is crucial to the future defence policy,
security and strategic independence of the UK. Currently DIP forms
part of a complex framework of defence, security, foreign policy,
economic, regional and social policies. Yet, unlike policy in
most other areas of Government activity, it relates to and is
influenced by them all. Thus a "joined up" approach
across the whole of Government is vital but not yet in evidence.
3. The DMA has been party to the production
of current written evidence on DIP to the Committee by the Defence
Industry Council (DIC) and supports its analysis. Generally this
evidence reports on a number of areas of ongoing dialogue between
Industry and the MoD. Although these are important in helping
to develop the right relationships to ensure a successful implementation
of DIP in future, they relate largely to process. Indeed, they
reflect a current preoccupation, at some levels within the MoD,
with process rather than output.
4. The Committee is to take verbal evidence
from representatives of the larger companies (including the Chairman
of the DMA) and examine the progress of key projects. Rather than
reinforce that evidence we would choose, now, to draw attention
to significant concerns, of companies further down the supply
chain, which we believe have significant consequences for DIP.
Current MoD procurement policy places great emphasis on doing
business via Prime Contractors. Prime Contractors are under great
budgetary pressures, from the MoD and elsewhere, to operate globally
and, understandably, will seek systems and sub-systems from wherever
in the world they can be procured at best value for the benefit
of the project in hand. Many lower tier jobs in defence manufacturing,
as in other sectors, are thus being transferred to developing
countries. At the same time, many defence Prime Contractors have
major offset obligations to other countries, as a result of success
in the defence export market. This is further adding to the erosion
of jobs and also leading to a transfer of defence technology from
the UK. It is true that UK companies benefit from incoming offset
opportunities, mainly from the USA, but the current balance between
UK's defence offset obligations to opportunities is 2:1 (circa
£10 billion owed for £5 billion gained). Whilst there
are now clear MoD guidelines for the consideration of DIP factors
in the selection of Prime Contractors there is currently no effective
mechanism for assessing and influencing the Defence Industrial
Policy aspects of the procurement decisions of the Primes themselves.
This is leading to a serious erosion of capability in the UK defence
supply chain and the loss of some well established UK SMEs with
unique products and expertise. Ironically, this situation arises
most with non-competitive procurements. In major competitions
(such as CVF) there is usually political and public guarantee
by the bidders, outwith the MoD process, of the security of jobs
and technology in the UK.
SMART ACQUISITION
5. The DMA has previously reported to the
Committee on the experiences of its members of Smart Acquisition.
Improved relationships and communications have been balanced by
concerns about "stovepiping" (ie. lack of coherence/integration)
between projects, excessive risk transfer to suppliers, reducing
technical expertise amongst DPA staff and the bureaucratic burden
for companies that have to deal with a large number of separate
Integrated Project Teams (IPTs). We therefore, very much welcome
the recent changes introduced, following a "Stocktake",
by the Chief of Defence Procurement (CDP) which include improved
key supplier management, a new (and somewhat more hierarchical
than of late) organisation in the Defence Procurement Agency (DPA)
and increased project responsibility for his senior Directors.
This should greatly improve coherence between projects and in
the procurement process.
6. The single, largest complaint from DMA
member companies at present is of excessive delays in MoD decision
making. This is not confined to one area of the MoD and relates
equally to PPP/PFI projects as to conventional procurements. These
delays are very expensive and frustrating for industry and costly,
too, for the MoD. Examples, apart from the high profile ones such
as FRES and Air Tanker, include the Future Support Vehicle (FSV),
Airfield Service Support Project (ASSP), Chatham Facilities Management
and Armoured Vehicle Training Systems (AVTS). The latter is years
late and currently undergoing a third round of best and final
(sic) bidding.
7. PPP/PFI support projects are of particular
concern. Many of them involve a public sector comparator (PSC)
based on the costs of the current, in service, provision. Invariably,
industry is invited to bid for the provision of an improved and
less risky service. It is not surprising that the cost of each
of the competing bids often exceeds the MoD's budget provision,
projects cannot proceed as planned and the options are still being
studied long after original deadlines have passed.
8. With regard to through life management
(TLM), there is clearly much still to be done before a really
effective approach is found in the MoD to the challenge of funding
and managing projects on this basis. Investment up front in procurement
to achieve real support costs savings downstream is still a strong
aspiration rather than a reality at present. However, recent decisions
by CDP and Chief of Defence Logistics (CDL) to make all their
IPTs dual-accountable and give added emphasis to through life
management (TLM) are important enablers. They will require equal
support and commitment from the Treasury, MoD Centre, Industry
and from their Navy, Army and Air Force Customers if they are
to succeed.
May 2004
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