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.
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