Select Committee on Defence Seventh Report

7  Competition and partnering arrangements


79. Section A7 of the DIS considers competition, alternative approaches to competition and presenting, measuring and delivering value for money in defence.[145] In his Statement to the House on 15 December 2005, the Secretary of State said that:

    value for money remains the bedrock of our commercial policy. Competition will remain a major element of that, but it will not be used when other tools, such as partnering, would deliver a better outcome, or where it would impinge on our operational sovereignty. The defence industrial strategy does not signal a move in the direction of protectionism.[146]


80. The DIS states that:

Over the past four years some three-quarters of the MoD's contracts, by value, have been let competitively. [148]

81. Lord Levene of Portsoken told us that when he had been Chief of Defence Procurement, between 1985 and 1991, there had been an "era of competition". The Major Projects Statement 1991 had reviewed 37 projects each in excess of £100 million, and had found that the cost of the projects were within one per cent of what the MoD had estimated and 28 had been expected to be completed on time.[149] He told us that "we did get value for money. We did get projects, almost without exception, delivered on time and on cost".[150]

82. In contrast the Chief Executive of BAE Systems considered that competition had "been a disaster for the UK defence industrial base…if it had continued, you would have seen the end of prime systems capability in the UK".[151] He considered that one of the key plus points to come out of the DIS was the recognition of partnership instead of competition.[152]

83. The Chairman of the DIC considered that there were areas where partnership was the right answer and other areas where competition was the right answer. He thought that, in order for a company to be successful, it needed products that were capable of being sold overseas against competition.[153]

84. The Minister also emphasised that "if you have got a market which allows you to have a competition, then competition is the right tool".[154] However, he did not consider that competition had been a disaster.[155] The DIS states that, owing to issues such as technological complexity, globalisation and industry consolidation, "priced based competition may not automatically result in the best opportunity for successful acquisition or maintain key sovereign capabilities".[156]

85. In a sector such as fast-jet aircraft, the UK only has one company with the capacity and capability to deliver the MoD's requirements: competition in that environment is not achievable, or at least not compatible with maintaining national capability. We agree that competition is not the right answer for all procurement and that the MoD should move towards long-term partnering arrangements in a number of areas.

Partnering arrangements

86. The DIS identifies alternatives to competitive procurement, and states that there will be more use of partnering arrangements.[157] Areas in which the MoD was exploring long term partnering arrangements included the through-life support of most of its fixed-wing fleet[158] and its armoured fighting vehicles[159], with BAE Systems. The MoD was also considering such an arrangement with AgustaWestland in relation to supporting and upgrading its helicopter fleet.[160]

87. During our inquiry into the MoD Annual Report and Accounts 2004-05, MoD's Finance Director, Mr Trevor Woolley, told us that:

    the advantages of having a long-term contract is that it gives a degree of certainty to the private sector partners as to what the requirement is and that the business will be there and, through that, we expect to be able to drive down the costs and provide efficiency.[161]

88. Some of the evidence we received raised concerns about BAE Systems being in the position of a monopoly supplier. Professor Hartley told us that he was concerned about the shift from competition towards partnering, which he thought might start to create domestic monopolies and guaranteed markets.[162] He considered that the DIS confirmed BAE Systems' dominance in the UK defence market "with its domestic monopolies in air, land and sea systems" and suggested that consideration should be given to regulating the company in the same way that the UK regulated its privatised utilities.[163]

89. We raised these concerns with the Chief Executive of BAE Systems. Mr Turner considered that his company had been in a position of a monopoly supplier on air systems for "decades", but said that this had been "very good, very healthy for the UK".[164] He also told us that BAE Systems considered that the company was regulated through the "profit formula."[165]

90. The Minister considered that it was good for the UK to have a global defence company such as BAE Systems. He recognised the concerns expressed about BAE Systems being in a monopoly situation, but suggested that the "boot is on the other foot". He said that only five per cent of MoD defence contracts by value, per year, went to BAE Systems, while the MoD represented 28 per cent of their turnover. MoD was, therefore, a very important customer to BAE Systems.[166] While it may be the case that only a relatively small proportion of the MoD's overall defence contracts by value go to BAE Systems each year, the company is clearly of vital importance to MoD. It is involved in many of the largest defence equipment programmes: the Astute Class Submarine; the Joint Strike Fighter; Nimrod MRA 4 aircraft; T45 Destroyer; Typhoon; and the Future Carrier.

91. Lord Drayson accepted that the MoD was in "a mutual dependence with BAE in some very important areas for us and we need to manage that with the appropriate management tools to get value for money for the British taxpayer".[167] He recognised the need for "tough partnership" and BAE Systems delivering improved performance in return for longer term business with MoD.[168] When the MoD entered into such long-term contracting arrangements, payments to companies would be linked to improved performance.[169]

92. Concerns have been raised about BAE Systems being in the position of a monopoly supplier in many areas. The company is likely to be the main contractor on a number of the long-term partnering arrangements that the MoD is considering. We look to MoD to demonstrate its awareness of these concerns and to build into long-term contracts incentives which encourage performance improvements.

93. The proposed partnering arrangements pose a potential threat to the 'sub-prime' companies and SMEs who will be dependent on the main contractor for access to sub-contract work. We heard concerns from some companies that they did not think they would get an opportunity to compete for the work underlying these long-term partnering arrangements, as they thought that the main contractor would place work with its subsidiaries or with those companies it already had business arrangements with.

94. We recognise that some of the contracts for long-term partnering arrangements will be let on a non-competitive basis. But for work underlying these arrangements there must be real competition. This is a matter about which we have considerable concern. We look to the MoD to ensure that there are rules in place which give clarity and transparency to the route to market for 'sub-primes' and SMEs. Other companies must be assured of an opportunity to compete for the work underlying the long-term partnering arrangements. We will return to this subject again.

145   Cm 6697, pp 48-51 Back

146   HC Deb, 15 December 2005, col 1466 Back

147   Cm 6697, para A7.1 Back

148   Cm 6697, para A7.2 Back

149   Q 84 and Q 86 Back

150   Q 89 Back

151   Q 259 Back

152   Q 258 Back

153   Q 259 Back

154   Q 310 Back

155   Q 311 Back

156   Cm 6697, para A7.5 Back

157   Ibid, para C1.15 Back

158   Ibid, para xxiii Back

159   Ibid, par xxii Back

160   Ibid, paras xxxi-xxxii Back

161   HC (2005-06) 822, Q 17 Back

162   Q 160 Back

163   Ev 104 Back

164   Q 261 Back

165   Q 262 Back

166   Qq 308-309 Back

167   Q 309 Back

168   Ibid Back

169   Q 310 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 10 May 2006